ECON Unit 3
Other things remaining the same, which of the following is likely to cause a decrease in both the wage rate and the number of workers hired in a glass factory?
The introduction of labor-saving technology in the factory
loss aversion
The strong tendency to regard losses as considerably more important than gains of comparable magnitude—and, with this, a tendency to take steps (including risky steps) to avoid possible loss.
Firms use information on labor's marginal revenue product to determine
how many workers to hire at each wage rate
Price elasticity of demand measures
how responsive quantity demanded is to a change in price.
A reason why a perfectly competitive firm's demand for labor curve slopes downward is that
in the short run, as more labor is hired, labor's marginal product falls because of the law of diminishing returns
The rules of accounting generally require that ________ costs be used for purposes of keeping a company's financial records and for paying taxes. These costs are sometimes called ________ costs
explicit; accounting
To maintain a monopoly, a firm must have
an insurmountable barrier to entry.
The public choice model
applies economic analysis to government decision making.
The term that is used to refer to a situation in which one party to an economic transaction has less information than the other party is
asymmetric information
In the long run, the entry of new firms in an industry
benefits consumers by forcing prices down to the level of average cost
Economic costs of production differ from accounting costs in that
economic costs add the opportunity costs of a firm using its own resources while accounting costs do not
A ________ is an extensive -form representation of a game
game tree
If a firm shuts down in the short run,
its loss equals its fixed cost
If at equilibrium, the marginal cost faced by a firm is $3 and the market wage rate is $6, the marginal product of the last unit of labor hired by the firm must be:
2 units
How are implicit costs different from explicit costs?
An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost
Why are decision trees useful to managers who plan business strategies?
Decision trees provide a systematic way of thinking through the implications of a strategy.
Which of the following is a reason why it is difficult to estimate the extent of economic discrimination in the labor market?
Differences in wages can be attributed to many other factors as well, such as differences in productivity and preferences
economy of scale
Long run average costs fall as output (q) increases
Sarah is a high school graduate and James is a college graduate. Which of the following statements is true?
James is likely to have more human capital than Sara
The difference between the salaries paid to movie stars and to actors who play supporting roles is much greater today than it was in the 1930s and 1940s. What factor explains this increase in relative salaries over time?
Technological advances in the entertainment industry increase the revenue that successful movies can earn. This has increased the movie studios' willingness to pay high salaries to movie stars
Ranchers can raise either cattle or sheep on their land. Which of the following would cause the supply of sheep to increase?
a decrease in the price in cattle
The wage rate is the opportunity cost of
leisure
The substitution effect of a wage increase is observed when
leisure's higher opportunity cost causes workers to take less leisure and work more
if a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in ticket revenue if it adds a sixth performance, the
marginal revenue of the sixth performance is $38,000
hidden action -->
moral hazard
A situation in which each firm chooses the best strategy given the strategies chosen by other firms is called a
nash equilibrium
If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then
new firms are attracted to the industry
If a typical firm in a perfectly competitive industry is earning profits, then
new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease
If, for a product, the quantity supplied exceeds the quantity demanded, the market price will fall until
quantity demanded equals quantity supplied. The market price will then equal the equilibrium price
A Nash equilibrium is
reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group
When there few close substitutes available for a good, demand tends to be
relatively inelastic
In many business situations one firm will act first, and then other firms will respond. To help analyze these types of situations economists use
sequential games
A player has a dominant strategy when:
she has only one best response to every possible strategy of the other player.
If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, then the firm
should shut down
Consider a used car market in which half the cars are good and half are bad (lemons). A rational buyer in this market should
offer to pay a price somewhere between the price she would pay for a good car and the price she would pay for a lemon
One reason why adverse selection problems arise in health insurance markets is that
sick people are more likely to want health insurance than healthy people
A warranty is an example of ________
signaling
Which of the following is a market-based solution to the problem of adverse selection?
signaling
You decide to carry a letter of recommendation from your college professor while going for your first interview. This is an example of ________
signaling
Which of the following is an example of pursuing a goal which is in a person's long-term interest?
succeeding in school
In analyzing the decision to shut down in the short run we assume that the firm's fixed costs are
sunk costs
Of the factors that are within the control of the firm's owners, the most important factors that make a firm successful are
the differentiation of its products and the production of products at a lower average cost than competing firms
Which of the following factors will not cause the labor demand curve to shift? the wage rate changes in technology increases in human capital a change in the price of the product produced with labor
the wage rate
Scenario: Jack and Jill are two siblings. Jack's father asked him how much he would offer to Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money Refer to the scenario above. This is an example of a(n) ________
ultimatum game
(T/F) When marginal cost equals average total cost, average total cost is at its highest value
false
(T/F) If marginal cost is above the average variable cost, then average variable cost is decreasing.
false
Profit =
TR - TC or (P - ATC) x Q
Adam spent $10,000 on new equipment for his small business, "Adam's Fitness Studio." Membership at his fitness center is very low and at this rate, Adam needs an additional $12,000 per year to keep his studio open. Which of the following is true?
The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000 he'll need to continue operations is a variable cost
Which of the following would cause an increase in the equilibrium wage?
The demand for labor increases faster than the supply of labor
How will an increase in labor productivity affect equilibrium in the labor market?
The demand for labor will increase and the equilibrium wage and quantity of labor will increase
Which of the following will happen if a firm in a duopoly with homogeneous products increases its price above its marginal cost once a Nash equilibrium is reached?
The firm will lose all its customers to its rival
What is the difference between the marginal product of labor and the marginal revenue product of labor for a firm in a perfectly competitive market?
The marginal revenue product of labor is equal to the marginal product of labor multiplied by the product price
Prisoner's dilemma games imply that cooperative behavior between two people or two firms always breaks down. But reality teaches us that people and firms often cooperate successfully to achieve their goals. Why do the results from prisoner's dilemma games fail to predict real-world results?
The prisoner's dilemma does not apply to most business situations that are repeated over and over.
Signaling takes place in markets with ________
asymmetric information
Adverse selection occurs in the market for used cars because used car buyers
have less information than used car sellers.
Diet Coke ________ considered a product in a monopoly market, because ________
is not; it has many substitutes
When people who buy insurance change their behavior after the purchase because they are protected from loss by the insurance, the insurance market is said to face the problem of
moral hazard
a best response is ______
one player's optimal action choice taking the other player's action as given
The highest-valued alternative that must be given up to engage in an activity is the definition of
opportunity cost
A game is called a simultaneous move game if ________
players choose their actions at the same time
Firms often refer to the process of lowering average fixed cost as "______________________."
spreading the overhead
A ________ is a complete plan describing how a player will act
strategy
In the long run, a perfectly competitive market will
supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.
Economically rational means that consumers and firms
take actions that are appropriate to reach goals given available information
If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of
the principle-agent problem
An individual's labor supply curve shows
the relationship between wages and the quantity of labor that she is willing to supply.
A payoff matrix shows ________.
the return from each action that players can take in a game
If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35, what is the firm's average fixed cost at that level of output?
$15
If the market price is $25 in a perfectly competitive market, the marginal revenue from selling the fifth unit is
$25
If at equilibrium, the marginal cost faced by a firm is $6 and the marginal product of the last unit of labor hired by the firm is 2 units, the market wage rate must be:
$3
If the value of marginal product of a worker is $40 and the marginal product of the worker is 8 units, the market price of the good he produces is:
$5
If average total cost is $50 and average fixed cost is $15 when output is 20 units, then the firm's total variable cost at that level of output is
$700
If a worker can produce 20 units of output which can be sold for $4 per unit, what is the maximum wage that firm should pay to hire this worker?
$80
Asymmetric Information
(between buyers and sellers) . hidden actions . hidden characteristics
Backwards Bending Labor Supply Curve
- the higher wages lead to less labor supply (increase in wages can equal more leisure hours)
What causes changes in labor supply?
1. Changes in population 2. Changes in alternatives
How can monopolies form?
1. Government action blocks - patents and copyrights - public franchise 2. Control of a key resource 3. Network externalities : value of a product increases the more people use it 4. Natural Monopoly - economies of scale - one firm can supply more cheaply than multiple firms
why does labor demand change?
1. Human capital 2. Changes in technology - labor-saving tech (reduce the demand for labor) - labor-complimentary technology (increases the demand for labor) 3. Changes in the price of the output good 4. Changes in the number of firms
Micheal Porter's Five Forces
1. competition for existing firms 2. threat from potential entrance 3. competition from substitutes 4. bargaining power of buyers 5. bargaining power of suppliers
oligopoly competition
1. few firms 2. some barriers to entry 3. identical or diff. products
perfect competition
1. many buyers and sellers, all small 2. identical products 3. no barriers to entry
monopolistic competition
1. many firms 2. low barriers to entry 3. differentiated products ex: restaurants
monopoly
1. one seller 2. one unique product with no close substitutes 3. barriers to entry
Behavioral economics (rules)
1. people try to choose the best feasible option, but sometimes fail 2. people care (in part) about reference points 3. people have self control problems 4. limiting peoples choices could make them better off, but in practice, the reward is mixed
a game has...
1. players 2. strategies 3. payoffs
price increase
1. sells fewer units 2. more revenue per unit
Which of the following is an example of adverse selection?
A customer buying a defective appliance from a used goods market
Which one of the following about a monopoly is false?
A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly
Which of the following is likely to cause a decrease in the wage rate and an increase in the employment level of a country?
A right shift in the supply curve for labor, without any change in the demand curve for labor
Which of the following is true of a simultaneous move game?
All relevant benefits and costs of each action are taken into account
In recent years, Amazon has lowered its profits by offering some of its customers free shipping on books and building more warehouses to hold its book inventories. Which of the following explains Amazons actions?
Amazon took these actions to compete more effectively with existing online booksellers
Why is the supply curve of labor usually upward sloping?
As the wage increases, the opportunity cost of leisure increases, causing individuals to devote more time to working
Which of the following is not true for a firm in perfect competition? Profit equals total revenue minus total cost. Marginal revenue equals the change in total revenue from selling one more unit. Price equals average revenue. Average revenue is greater than marginal revenue
Average revenue is greater than marginal revenue
The De Beers Company, one of the longest-lived monopolies, is facing increasing competition. One source of competition comes from people who might resell their previously owned diamonds. Why is De Beers worried that people might resell their previously owned diamonds?
Because previously owned diamonds would be a close substitute to newly mined diamonds and would therefore reduce De Beers' market power
In the United States, the bulk of health care spending is paid by health insurance companies. Such a system is also called a third-party payer system where consumers of health care pay a nominal fee and the rest are paid by the health insurance provider. Why might such a system lead to an inefficient outcome?
Consumers have an incentive to over-consume health care services because they pay prices well below the cost of providing these services.
What is the dominant strategy in the prisoner's dilemma?
Each prisoner confesses because this is the rational action to pursue
Define economic discrimination.
Economic discrimination is paying a person a lower wage or excluding a person from an occupation on the basis of an irrelevant characteristic such as gender
Which of the following statements is false? An implicit cost is a nonmonetary opportunity cost. An explicit cost is a cost that involves spending money. Economic costs include both accounting costs and implicit costs. Economists consider all costs to be implicit costs
Economists consider all costs to be implicit costs
Which of the following statements is true? Employers are willing to forego profits when engaging in taste-based discrimination. Employers are willing to forego profits when engaging in special interest group discrimination. Employers are willing to forego profits when engaging in cultural discrimination. Employers are willing to forego profits when engaging in statistical discrimination.
Employers are willing to forego profits when engaging in taste-based discrimination
Which of the following correctly identifies a difference between taste-based discrimination and statistical discrimination?
Employers engaging in taste-based discrimination are willing to forego profits, whereas employers engaging in statistical discrimination are trying to enhance profits
What does the phrase "internalizing an external cost" mean?
Forcing producers to factor into their production costs the cost of the externalities created in the production of their output
Rob Neyer is a baseball writer for sbnation.com. He has described attending a Red Sox game at Fenway Park in Boston and having a great seat in the sun on a hot, humid day: "Granted, I could have moved under the overhang and enjoyed today's contest from a nice, cool, shady seat. But when you paid forty-five dollars for a ticket in the fourth row, it's tough to move back to the twenty-fourth [row]." Source: Rob Neyer, Feeding the Green Monster, New York: iPublish.com, 2001, p.50. What should Rob do?
He should weigh the marginal cost of moving into the shade (a less desirable view) versus the marginal benefit of being under the shade
Which of the following is true of an extensive-form game?
It involves sequential decision making by the players
Which of the following statements best describes the economic short run?
It is a period during which at least one of the firm's inputs is fixed
What is the principal-agent problem?
It is a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them.
What is moral hazard?
It refers to the actions people take after they have entered into a transaction that makes the other party to the transaction worse off.
What is adverse selection?
It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
Which of the following is true of a payoff matrix?
It takes into account all relevant costs and benefits associated with each action of the players.
Which of the following statements is true? A. Educational qualifications and wage rates are negatively correlated. B. Lower wages are normally offered for jobs with better amenities. C. Incentives are normally higher for desirable occupations in comparison to undesirable occupations. D. Jobs that are relatively risky pay a lower wage than other safer jobs.
Lower wages are normally offered for jobs with better amenities
A firm could continue to operate for years without ever earning a profit as long as it is producing an output where
MR > AVC
Which of the following is true of a Nash equilibrium?
No player can improve his payoff by changing his strategy once in Nash equilibrium
Peet's Coffee and Teas produces some flavorful varieties of Peet's brand coffee. Is Peet's a monopoly?
No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes
The average price of gasoline in your neighborhood is $2.15 per gallon. Your neighbor, Diana tells you that you can "save a lot" by frequenting a gas station 20 miles outside your neighborhood where the price of gasoline is $2.06 per gallon However, she cautions you that there are usually long lines at that station. Is her suggestion beneficial to you?
No, if one factors in the non-monetary opportunity costs (driving time and waiting in line), it could prove more costly to go to the lower-priced gasoline station
The average price of gasoline in your neighborhood is $2.15 per gallon. Your neighbor, Diana tells you that you can "save a lot" by frequenting a gas station 20 miles outside your neighborhood where the price of gasoline is $2.06 per gallon. However, she cautions you that there are usually long lines at that station. Is her suggestion beneficial to you?
No, if one factors in the non-monetary opportunity costs (driving time and waiting in line), it could prove more costly to go to the lower-priced gasoline station
Suppose that a firm in a competitive market succeeds in producing a superior product and selling it at a price that generates a large demand. As a result, the firm's market share is almost 100 percent. Meanwhile, other firms are trying to regain their market shares through research and development. Is this firm a monopolist?
No, there is potential competition
Is the fact that one group in the population has higher earnings than other groups evidence of economic discrimination?
No. Differences in earnings between groups could be due to worker productivity. No. Differences in earnings between groups could be due to worker preferences
If wages increase, will a worker supply more labor?
Only if the effect of the opportunity cost of leisure increasing is larger than that of the increase in purchasing power
Let MP = marginal product, P = output price, and W = wage, then the equation that represents the condition where a competitive firm would hire another worker is
P x MP > W
Which of the following is not a result of government price controls? Some people win and some people lose. Price controls decrease economic efficiency. Price controls benefit poor consumers but harm producers and wealthy consumers. A deadweight loss will occur
Price controls benefit poor consumers but harm producers and wealthy consumers
Which of the following offers the best reason why restaurants are not considered to be perfectly competitive firms?
Restaurants do not sell identical products
Suppose you pre-ordered a non-refundable movie ticket to X-Men: Apocalypse. On the day of the movie you decide that you would rather not go to the movie. According to economists, what is the rational thing to do?
Since the cost of the movie ticket is a sunk cost, it should not influence your decision. Your decision should be based solely on whether you want to see the movie or not.
Some superstar athletes in the sports industry earn very high levels of income relative to other occupations, and over time the wage differential has been increasing. What could have caused this?
Technological advances such as cable television has increased the demand for sports entertainment
Suppose two firms in a duopoly implicitly collude and charge a high price. How might each firm benefit from advertising that it will match the lowest price offered by its competitor?
The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same
A student argues, "The prisoner's dilemma game is unrealistic. Each player's strategy is based on the assumption that the other player won't cooperate. But if each player assumes that the other player will cooperate, then the 'dilemma' disappears." Is this argument correct or incorrect?
The argument is incorrect. The best strategy for each player is to not cooperate no matter what the other player does
Which of the following correctly identifies the difference between the demand for labor and the demand for final goods?
The demand for labor is derived from the demand for final goods, whereas the demand for final goods is independent of the demand for labor
In what sense do employers who discriminate pay an economic penalty?
The employers face higher costs, lower profit and eventual elimination from the market.
What happens to the equilibrium wage and quantity of labor if output price rises?
The equilibrium wage and the equilibrium quantity of labor rise
Which of the following is likely to lead to a left shift in the supply curve for labor to a firm?
The establishment of a new firm nearby that offers higher wages
Assume that the 4K and OLED television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run?
The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation
Other things remaining the same, which of the following is likely to happen if there is a decrease in the price of flour products?
There will be a decrease in both the wage rate and the employment levels in the flour industry
Ceteris paribus, which of the following is likely to happen if an industry introduces labor-saving technology in production?
There will be a decrease in both the wage rate and the employment levels in the industry
Other things remaining the same, which of the following is likely to happen if all homemakers in an economy start working as paid labor?
There will be a fall in the wage rate in the country and an increase in the employment level
The typical labor supply curve is upward sloping but it is possible for the curve to be backward bending — negatively sloped — at very high wage levels. Which of the following would cause a backward-bending supply curve?
This would occur when the income effect from an increase in the wage becomes larger than the substitution effect
If a monopolist's marginal revenue is $35 per unit and its marginal cost is $25, then
To maximize profit the firm should increase output
Total Profit =
Total Revenue - Total Cost
Average total cost is equal to
Total cost divided by the quantity of output produced
The total value to society of having garbage removed is greater than the value of baseball games. Why, then, are baseball players paid more than garbage collectors?
Wages do not depend on total values but marginal values. The marginal revenue product of baseball players exceeds the marginal revenue product of garbage collectors
Which of the following is an example of a long-run adjustment? Walmart builds another Supercenter. A soybean farmer turns on the irrigation system after a month long dry spell. Ford Motor Company lays off 2,000 assembly line workers. Your university offers Saturday morning classes next fall
Walmart builds another Supercenter
Let MRP equal the marginal revenue product of labor and W equal the wage rate. When should a firm hire more workers to increase profit?
When MRP > W
Women typically earn less than men, even in the same occupation. Which of the following is an explanation for this discrepancy?
Women have, on average, less workforce experience than men of the same age
Which of the following is a likely reason for wage inequality between men and women?
Women tend to spend more time out of the labor force as compared to men
Is there a connection between how people are paid and what they contribute to people's well being?
Yes, because if the output of a market improves well being, then all else equal, more people will demand the product, the labor used to produce it will increase, and the wage rate will rise
Scenario: Your car broke down while you were driving to the office one morning. You took it to the nearest service center and were told by the mechanic that you need to pay $500 for the repair. You are confused whether or not to trust him. If you do not trust him, you have to take it to another service center, which is far away and inconvenient. If you trust him, he can either cooperate or defect (do an honest job or not). If he does an honest job, both of you will gain from the trade. If he does not do an honest job, he will gain $500 while you will lose your money. Clearly, he will gain more by defecting rather than cooperating with you Refer to the scenario above. Which of the following is likely to happen if the service center has a reputation of trustworthiness?
You will trust the mechanic and he will cooperate
If the painting firms in a city sign a contract outlining a pricing plan, they are involved in
collusion
Which of the factors listed below does not cause the demand curve for labor to shift? A. a change in technology B. a change in the price of the product C. a change in human capital D. a change in the wage
a change in the wage
Larry and Mike are equally skilled construction workers employed by the Brown and Root Company. Larry's job is riskier because he typically works on a scaffold 1,000 feet above ground. Larry's higher wage rate is the result of
a compensating differential
Which of the following is the best example of a perfectly competitive firm? the Ford Motor Company a corn farmer in Illinois United Parcel Service (UPS) a Taco Bell restaurant
a corn farmer in Illinois
A sequential game can be used to analyze whether a retail firm should build a large store or a small store in a city, when the correct choice depends on whether a competing firm will build a new store in the same city. Which of the following is used to analyze this type of decision?
a decision tree
A price maker is
a firm that has some control over the price of the product it sells
Relative to a perfectly competitive market, a monopoly results in
a gain in producer surplus less than the loss in consumer surplus
What is a prisoner's dilemma?
a game in which players act in rational, self-interested ways that leave everyone worse off
A firm can use anchoring to influence consumer choices so as to increase sales by marking
a high "regular price" on a product, which makes the discounted "sale price"appear to be a bargain
Consider a used car market in which half the cars are good and half are bad (lemons). If buyers are rational, the prices being offered for used cars will result in
a larger proportion of lemons being sold and consequently, producer surplus is increased.
behavioral economics
a relatively new field of economics that uses variations of traditional assumptions about rationality and optimization to explain behavior, often drawing from insights in psychology
Nash Equilibrium
a set of strategies in which no player ha an incentive to change
A dominant strategy is
a strategy that is the best for a firm no matter what strategies other firms use
Which of the following would be categorized as an opportunity cost? a. not being able to spend your $10,000 savings if you sink the money in your business b. the cost of purchasing supplies for your house-cleaning business c. the cost of purchasing auto insurance for your dry-cleaning delivery business
a. only
market power
ability to set P > MC
Marginal cost is the
additional cost of producing an additional unit of output
An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better than the company that he is more likely to make a claim on a policy. What is the term used to describe the situation above?
adverse selection
An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better that the company that he is more likely to make a claim on a policy. What is the term used to describe the situation above?
adverse selection
Consider a used car market in which half the cars are good and half are bad (lemons). Suppose the average price of a good car is $9,000 and the average price of a lemon is $3,000. If rational buyers are willing to pay $6,000 for a used car, then sellers will agree to sell mostly lemons at this price. What is the term used to describe this situation?
adverse selection
Scenario: The market for used cell phones is very popular in Barylia. However, several phones available in this market are of inferior quality and it is often impossible to differentiate between a good-quality phone and a poor-quality phone. Refer to the scenario above. Which of the following problems is likely to arise in the market for used cell phones in Barylia?
adverse selection
________ occurs when one agent in a transaction knows about a hidden characteristic of a good
adverse selection
hidden characteristics -->
adverse selection
signaling
an action taken by an informed party to reveal private information to an uninformed party - costly actions undertaken to indicate private information to others
An increase in the demand for orthodontic services leads to
an increase in the demand for orthodontists
An increase in a perfectly competitive firm's demand for labor could be caused by
an increase in the market demand for the firm's product.
Which of the following is likely to lead to a left shift in the demand curve for labor in the petroleum extraction industry? A. An increase in the price of petroleum B. An increase in the price of cars C. An increase in the wage rate D. A decrease in the wage rate
an increase in the price of cars
If the demand for labor is unchanged, an increase in the supply of labor will lead to
an increase in the quantity of labor demanded and a decrease in the equilibrium wage
A decrease in the wage rate causes
an increase in the quantity of labor demanded.
Scenario: Jack and Jill are two siblings. Jack's father asked him how much he would offer to Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money Refer to the scenario above. A player should use ________ to play this game
backward induction
Scenario: You walk onto a used-car lot to buy a car. You are willing to pay up to $15,000 for a car of good quality but you value a lemon at $0.You are now wondering whether you should trust the car dealer regarding the quality of the car. If you choose to trust him, he can choose to cooperate or defect. If you do not trust him, neither will he earn money nor will you be able to buy a car and use it. If you trust him and he cooperates, both of you will gain because the dealer values a good-quality car at $13,000. However, if he defects, he will earn $15,000 while you will not derive any satisfaction Refer to the scenario above. You should use ________ to arrive at a decision
backward induction
The first mover in an extensive-form game should use ________ to win the game
backward induction
Microsoft hires marketing and sales specialists to decide what prices it should set for its products, whereas a wealthy corn farmer in Iowa, who sells his output in the world commodity market, does not. Why is this so?
because Microsoft could potentially lose sales if it sets prices indiscriminately
Which of the following statements about rent seeking is false?
because rent seeking redistributes society's resources, anyone engaging in such behavior is violating the law.
Which branch of economics considers that economic agents do not always act rationally?
behavioral economics
Company A and Company B are considering whether to spend a certain sum of money to advertise their new range of products. If Company A chooses to advertise while Company B does not, Company A's annual sales will increase by $5 million while Company B's sales will remain unchanged. If Company B chooses to advertise while Company A does not, Company B's annual sales will increase by $5 million while Company A will not experience any change in its sales. If both companies decide to advertise, their sales will increase by $2 million each and if neither spends on advertisement, their sales will remain unchanged. Refer to the scenario above. If the cost of advertising is negligible, what will be the outcome of this game?
both companies will advertise
What happens as a firm increases the number of workers that it hires?
both the marginal product of labor and the marginal revenue product of labor decrease
P = ATC
break even zero economic profits shut down point
In a market with asymmetric information, ________.
buyers and sellers have different information about the good being traded
Adverse selection arises in the health insurance market because ________
buyers have private information
In the market for health insurance, asymmetric information problems arise because
buyers of health insurance policies always know more about the state of their health than do the insurance companies
Suppose you have worked at a local sandwich shop for six months and now you plan to ask your manager for a raise. How can you convince your manager that you are worth more money than you are currently being paid?
by demonstrating to your manager the marginal revenue product your employment contributes to the sandwich shop
The substitution effect of a wage increase
causes a worker to supply a larger quantity of labor, and the income effect causes a worker to supply a smaller quantity of labor.
In an oligopoly, firms can increase their market power by
colluding to set prices
The economic penalty is not enough to eliminate discrimination because of the presence of all of the following except customer discrimination. worker discrimination. negative feedback loops. compensating differentials
compensating differentials
As word processing on personal computers expanded, sales of typewriters began to disappear. Which competitive force does this event demonstrate?
competition from substitute goods or services
fixed costs remain ______ as output increases
constant
The difference between the highest price a consumer is willing to pay for a good and the price the consumer actually pays is called
consumer surplus
Which of the following is most likely to a variable cost for a business firm? A. property taxes B. cost of shipping products C. interest on long-term outstanding bonds D. rent on the office building
cost of shipping products
Sunk costs are
costs that have already been paid and cannot be recaptured in any significant way
Customer discrimination occurs when
customers refuse to buy products produced by a racially diverse workforce.
Decision trees are commonly used to illustrate how firms make business decisions that depend on the actions of rival firms. A decision tree has boxes that contain points that represent when firms must make the decisions contained in the boxes. What are these points called?
decision nodes
the demand for labor is a _________ demand
derived
compensating wage differentials
differences in wages that offset differences in working conditions
In order to be useful as a signal in a market with information asymmetry, the signal must be ________
difficult to obtain
taste-based discrimination
discrimination that arises due to people's prejudices against a group of people
For a perfectly competitive firm, which of the following is not true at profit maximization?
each buyer and seller is too small relative to others to independently affect the market price
A Nash equilibrium occurs if ________
each player chooses strategies that are mutual best responses
A Nash equilibrium is reached when
each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group
In a simultaneous move game, ________
each player has to make his choice without knowing his rival's choice
If two duopolists can collude successfully, then both will
earn greater profits than if they did not collude
Any cost that remains unchanged as output changes represents a firm's
fixed cost
P < ATC
economic losses business will shut down
P > ATC
economic profit stay in business in the short run
economic profits lead to firm _______
entry
Marginal revenue product of labor for a competitive seller is
equal to the marginal product of labor multiplied by the output price
If fixed costs do not change, then marginal cost
equals the change in variable cost divided by the change in output.
economic losses lead to firm _______
exit
(T/F) All else equal, as the price of a product falls, the quantity supplied increases
false
(T/F) Due to adverse selection, very few lemons will be sold in the market for used cars
false
(T/F) Economic costs include implicit costs but not explicit costs
false
(T/F) If price is equal to average variable cost, then a perfectly competitive firm breaks even.
false
(T/F) If the demand for labor is unchanged, population growth will increase the supply of labor and increase the equilibrium wage
false
(T/F) Technological advancements that increase labor's productivity shift the labor supply curve to the right.
false
(T/F) The incidence of a tax depends on whether the government collects the tax from buyers or sellers
false
(T/F) The substitution effect of a wage decrease examines the effect of the decrease in wage income on a worker's ability to consume goods and services
false
The perfectly competitive market structure benefits consumers because
firms are forced by competitive pressure to be as efficient as possible.
In long-run perfectly competitive equilibrium, which of the following is false?
firms earn an economic profit
Most economists believe that a small amount of the gap between the wages of white males and the wages of other groups is due to discrimination. Which of the following factors is not another factor that explains part of this gap? geographic location differences in education differing preferences for jobs differences in experience
geographic location
productive efficiency
goods and services are produced at the lowest possible cost
A patent or copyright is a barrier to entry based on
government action to protect a producer.
A profit-maximizing monopoly's price is
greater than the price that would prevail if the industry was perfectly competitive
A profit maximizing monopoly's price is
greater than the price that would prevail if the industry was perfectly competitive.
Scenario: The market for used cell phones is very popular in Barylia. However, several phones available in this market are of inferior quality and it is often impossible to differentiate between a good-quality phone and a poor-quality phone. Refer to the scenario above. Based on the given information, we can conclude that the market for used cell phones in Barylia:
has asymmetric information
Compensating differentials are associated most closely with which of the following?
hazardous jobs
In an extensive-form game, payoff to a player is usually higher if ________
he is the first mover
Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. However, the winning amount was handed over by the organizers to their professor who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund Refer to the scenario above. If Joseph prefers money to fairness, _______
he will always accept any offer made to him
_____ discourage low-risk individuals from seeking health insurance
high premiums
when switching costs are _______, suppliers have more bargaining power
higher
Compensating differentials are
higher wages that compensate workers for unpleasant aspects of a job
The combined effect (both income and substitution) of a wage increase is that
if the substitution effect outweighs the income effect, the labor supply curve slopes upward, but if the income effect outweighs the substitution effect, the labor supply curve is backward bending
As the income of an individual increases, he can afford more leisure. This refers to the ________ of a wage increase.
income effect
Which of the following is a source of market failure?
incomplete property rights or inability to enforce property rights
If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should
increase its output
As output __________, average fixed cost becomes smaller and smaller
increases
Which of the following helps in reducing the problem of adverse selection in health insurance markets?
insurance mandates
Which of the following is most likely to be a fixed cost for a farmer? A.cost of seeds B.cost of fertilizer C.wages paid to farm workers D.insurance premiums on property
insurance premiums on property
A public franchise
is a government designation that a private firm is the only legal producer of a good or service
The demand for labor is described as a derived demand because
it is derived from the demand for products that use labor in the production process
The long run refers to a time period
long enough for a firm to vary all of its inputs, to adopt new technology, and change the size of its physical plant
The decision rule for a profit-maximizing firm operating in a competitive market to hire an additional worker is the value of the:
marginal product of the worker should be equal to or greater than the wage rate
Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit-maximizing outputs?
marginal revenue is less than price
A firm's demand for labor curve is also called its
marginal revenue product of labor curve.
The marginal cost curve intersects the average variable cost curve and the average total cost curve at their ____________ points
minimum
Joseph starts driving with much less care after buying car insurance. His behavior is an example of ________.
moral hazard
Martha used to pay for her expenses with her own hard-earned money. She always tried to spend as little as she could. However, she started spending more when she received a scholarship. This behavior is an example of ________
moral hazard
State provision of free healthcare may encourage individuals to engage in unhealthy behavior, such as excessive smoking or consumption of alcohol. This is an example of ________.
moral hazard
A Nash equilibrium occurs when ________
none of the players can increase their payoffs by choosing a different strategy
implicit costs
nonmonetary opportunity costs
When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell
nothing at all; the firm shuts down
The basic idea behind moral hazard is that ________
people tend to take more risks if they do not have to bear the costs of their behavior
in perfect competition, production takes place until
price equals marginal cost
allocative efficiency
production represents consumer preferences
Which of the following describes a situation in which a good or service is produced at the lowest possible cost?
productive efficiency
Which of the following displays these two characteristics: nonrivalry and nonexcludability in consumption?
public goods
Sequential games are used to analyze
situations in which one firm acts and other firms respond.
Employers engaging in ________ try to enhance their profits
statistical discrimination
When expectations cause people to discriminate against a certain group, it is referred to as:
statistical discrimination
Discrimination that occurs when people's preferences cause them to discriminate against a certain group is referred to as:
taste based discrimination
An employer discriminating against Asian workers is an example of:
taste-based discrimination
The processes a firm uses to turn inputs into outputs of goods and services is called
technology
Which of the following is an example of a factor that a firm's owners and managers can control in making the firm successful?
the ability to produce the product at a lower cost
The demand for labor depends primarily on the additional output produced as a result of hiring an additional worker and
the additional revenue received from selling the output produced as a result of hiring an additional worker
The restriction that a consumer's total expenditure on goods and services purchased cannot exceed the income available is referred to as
the budget constraint
marginal product of labor
the change in output from hiring one additional unit of labor - how much does each additional worker produce?
Which of the following is likely to be used as a signal in the job market? The degree obtained by the applicant An announcement of vacancy The job description The letter of appointment
the degree obtained by the applicant
The term "derived demand" refers to
the demand for a factor of production that is derived from the demand for the good the factor produces.
As the wage increases,
the demand for labor curve does not shift, but the quantity demanded of labor decreases.
Assume that the hourly price for the services of tarot card readers has risen and sales of these services have also risen. One can conclude that
the demand for tarot card readers has increased
What is likely to happen in a used-car market if the buyers feel that the best they can do is to buy a lemon?
the entire market shuts down
A firm's primary interest when it hires an additional worker is
the extra revenue the firm realizes from hiring that worker
What is always true at the quantity where a firm's average total cost equals average revenue?
the firm breaks even
Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21. Which of the following will happen?
the firm will not sell any output
The condition to decide on the optimal amount of leisure is that:
the marginal benefit of leisure should be equal to the wage rate
One reason why the average salary of Major League Baseball players is higher than the average salary of college professors is
the marginal revenue product of baseball players is greater than the marginal revenue product of college professors
In perfect competition,
the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.
The demand curve for a monopoly's product is
the market demand for the product
If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce
the moral hazard problem
Implicit costs can be defined as
the non-monetary opportunity cost of using the firm's own resources
The labor supply for an industry would decrease if the government welcomes foreign workers into the country. the percentage of the population from age 16 to 65 decreases. a greater percentage of women want to work outside the home. the wage rate falls.
the percentage of the population from age 16 to 65 decreases.
Mr. Smith put his laptop up for sale. He is aware of the fact that the laptop malfunctions frequently. However, none of the potential customers who came to buy the laptop were able to discover the problem and one of them actually bought it at a remunerative price. This occurred due to _______
the presence of asymmetric information
law of diminishing returns
the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline
human capital
the stock of skills that each person has that helps determine their productivity (knowledge, skills, education, etc)
What is behavioral economics?
the study of situations in which people act in ways that are not economically rational
If Molly Bee increases her work hours when her wage increases, then
the substitution effect of the wage increase outweighs the income effect.
Economic efficiency in a free market occurs when
the sum of consumer surplus and producer surplus is maximized.
If in the market for peaches the supply curve has shifted to the left
the supply of peaches has decreased
The opportunity cost of leisure is
the wage rate
A monopoly is characterized by all of the following except entry barriers are high. there are only a few sellers, each selling a unique product. there are no close substitutes to the firm's product. the firm has market power
there are only a few sellers, each selling a unique product.
All of the following are ways by which existing firms can deter the entry of new firms into an industry except
threatening to raise prices
(T/F) A doctor pursuing his own interests rather than the interests of his patients is an example of the principal-agent problem
true
(T/F) Adverse selection is a situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction
true
(T/F) An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short run.
true
(T/F) An increase in the price of grape juice causes an increase in the marginal revenue product of labor used to produce grape juice
true
(T/F) An increase in wages raises the opportunity cost of leisure and leads to an increase in the quantity of labor supplied
true
(T/F) For a natural monopoly, the marginal cost of producing an additional unit of its product is relatively small
true
(T/F) Higher wages that compensate workers for unpleasant aspects of a job are called compensating differentials
true
(T/F) If a firm shuts down in the short run, it avoids its variable cost but not its fixed cost
true
(T/F) Increases in population shift the market supply curve for labor to the right
true
(T/F) One reason college students do not study enough to get high grades is that they are unrealistic about their future behavior.
true
(T/F) The most important factor contributing to wage differences in the labor market is differences in the level of education and training among workers
true
Scenario: Robert and Alice are participating in a reality show on television. Robert is offered an amount of $500 and told that he can keep the money provided he shares some of it with Alice. Robert can offer Alice as much or as little as he likes, but if Alice rejects his offer, neither of them will get to keep any money Refer to the scenario above. This is an example of a(n) ________
ultimatum game
Game theory is applicable to oligopoly behavior because oligopolists
use strategic behavior
statistical discrimination
using information about group averages to make conclusions about individuals
in the long run, all of the firms costs are ________ costs
variable
Any cost that changes as output changes represents a firm's
variable cost
Because warranties are potentially ________, low-quality goods are ________ to have warranties.
very expensive; less likely
In the case of leisure, the substitution effect implies that:
when the price of leisure increases, people will work more
The prisoner's dilemma illustrates
why firms will not cooperate if they behave strategically
A monopoly is the only seller of a product
without a close substitute
