Econ Exam 3
If you charge everyone the same price, your business's average revenue curve is the same as the....
demand curve
Market power determines the shape of a firm's....
demand curve.
Free entry into a market tends to cause what to disappear?
desirable opportunities
Markets will _____ until the demand curve just touches the average cost curve.
either expand or contract
The opportunity cost of working is....
everything you do when you're not working
Average costs _____ with output
fall then rise
The highest profit margin occurs where the average cost curve is...
farthest below the demand curve
In a perfectly competitive labor market, the manager's hiring decision is about
how many workers to hire.
The substitution effect measures
how people respond to a change in relative prices.
Shopping around is a(n) _____ that many _____ customers aren't willing to leap over.
hurdle; less price-sensitive
Bundling creates a(n) _____ to(for) getting the second good at a _____.
hurdle; lower price
intrinsic motivation
the desire to do something for the enjoyment of the activity itself
Compensating differential
the differences in wages required to offset the desirable or undesirable aspects of a job
The difference between the firm demand curve and the marginal revenue curve is due to:
the discount effect.
In the labor market, _____ determine(s) wages and employment.
the forces of supply and demand
short run
the horizon over which the production capacity, and the number and type of competitors you face, cannot change
long run
the horizon over which you, or your rivals, may expand or contract production capacity and new rivals may enter the market or existing firms may exit
The cost of working one more hour is...
the hour of leisure that is given up.
Labor demand is equal to...
the marginal revenue product of labor
In a perfectly competitive labor market,
the market forces determine the wage.
Implicit Costs
the opportunity cost of resources already owned by the firm and used in business—for example, expanding a factory onto land already owned.
The marginal revenue curve of a firm with market power will always lie below its demand curve because of
the output effect and the discount effect.
Which of the following is an example of a focal point?
Noon serves as lunchtime in the United States.
New competitors mark your market....
less profitable
The exit of competitors from a market means that remaining firms will sell...
more products at higher prices
When segmenting your market demand into groups, base them on....
verifiable and difficult to change characteristics
Price discrimination through group pricing works when the basis for segmenting the consumers is...
verifiable; hard to change; separates consumers based on their reservation price for the product
Generally speaking, workers prefer extra _____ to extra _____.
wages; benefits
Free exit ensures industries...
wont remain unprofitable in the long run
The price elasticity of supply measures...
workers' responsiveness to wages
Coordination games can lead markets to....
yield bad outcomes
3 solutions to coordination problems
-Communication -Focal points, culture and norms -Laws and regulations
Market labor supply depends on...
-How many people decide to work -How many hours existing workers put in -Which occupations people choose
Monopsony power
A business using its bargaining power as a major buyer of labor to pay lower prices, including lower wages
Product differentiation
Efforts by sellers to make their products differ from those of their competitors
Rational Rule for Exit
Exit the market if you expect to earn a negative economic profit, which occurs if the price is less than your average costs.
Perfect Competition
Markets in which: 1.) All businesses in an industry sell an identical good 2.) There are many sellers and many buyers, each of whom is small relative to the size of the market
Substitution effect
Measures how people respond to a change in relative prices. A higher wage increases the returns to work relative to leisure, leading you to work more
Income effect
Measures how people's choices change when they have more income. A higher wage increases your income, leading you to choose more leisure and hence less work
Marginal Revenue Product
Measures the marginal revenue from hiring an additional worker. The marginal revenue product is equal to the marginal product of labor multiplied by the price of that product
pay-for-performance
Linking the income your workers earn to measures of their performance
Average revenue
Revenue per unit, calculated as total revenue divided by the quantity supplied. Average revenue is equal to the price, if you charge everyone the same price.
In the long run, free entry pushes economic profits...
down to zero
Free entry pushes the price....
down toward average cost
Higher wages lead more people to....
enter the labor force
When market leaders produce on a mass scale, economies of scale mean that new entrants:
have a hard time competing.
According to the income effect....
higher income makes leisure relatively more attractive
Price discrimination leads to...
higher prices for some and lower prices for other
According to the substitution effect....
higher wages make work relatively more attractive
The output in a market with market power is...
inefficient because the marginal benefit to society of extra output exceeds the marginal cost.
Solve finitely repeated games by....
looking forward and reasoning backward
discrimination
treating people differently based on characteristics such as their gender, race, ethnicity, sexual orientation, religion, disability, social class, or other factors
When companies exercise market power, _____ occurs. _____ can partially solve this problem.
underproduction; Price discrimination
Labor demand is downward-sloping because of....
diminishing marginal product
Focal Point
A cue from outside a game that helps you coordinate on a specific equilibrium
Most businesses operate in....
imperfectly competitive markets
Network effects mean....
your product becomes more useful the more people use it
Imperfect Competition examples
Monopolistic Competition and Oligopoly
Price Discrimination
Selling the same good at different prices
Game tree
Shows how a game plays out over time, with the first move forming the trunk, and then each subsequent choice branching out, so the final leaves show all possible outcomes.
Human capital
The accumulated knowledge and skills that make a worker more productive
Best response
The choice that yields the highest payoff for you given the other player's choice.
What happens in a perfectly competitive labor market, when an employer pays its employees less than the market wage?
The employees leave the company to work elsewhere.
Market Power
The extent to which a seller can charge a higher price without losing many sales to competing businesses
An example that would shift the labor supply curve.
The government increases its provision of childcare services.
What will be a major factor influencing which occupation you choose?
The market wage
second mover advantage
The strategic advantage that can follow from taking an action that adapts to your rival's choice
First mover advantage
The strategic gain from an anticipatory action that can force a rival to respond less aggressively
In choosing a career path, you are likely to succeed when you choose
an occupation you have a lower opportunity cost in relative to other people.
What is the dominant factor determining market price in the long run (assuming the industry has unrestricted entry)?
average costs
Your long-run profitability depends on....
barriers to entry
Higher wages create an incentive to...
invest in capital
profit margin
profits per unit sold = average revenue - average cost
In the long run, economic profits....
tend toward zero
Price discrimination increases....
the quantity you sell
Free exit pushes the price....
up toward average cost
statistical discrimination
using observations about the average characteristics of a group to make inferences about an individual
short run equation
variable costs + fixed costs = total costs
long run equation
variable costs = total costs
The Rational Rule for Sellers is that sellers should choose the quantity _____ and choose the price _____.
where marginal revenue equals marginal cost; that is on the seller's demand curve for that quantity
Reason backward
Start by analyzing the last period of the game. Use this to figure what will happen in the second-to-last period, and keep reasoning backward until you can see all the consequences that follow from today's decision.
Prune the tree method
Start by looking forward to the final period and highlighting out your rival's best responses, then prune the options the rival would never choose "the dead leaves" off your game tree.
Tell people to drive on the left-hand side of the road
Tell people to drive on the left-hand side of the road
Marginal Product of Labor
The extra production that occurs from hiring an extra worker
Reservation Price
The maximum price a customer will pay for a product. It is equal to their marginal benefit.
Why is pursuing a job in a "winner-take-all" market is risky?
The very best performers capture a large share of the rewards, leaving little for those who are just slightly less skilled.
What happens in the labor market for biologists when wages in other, similar occupations fall?
There is a rightward shift of the supply curve.
How can you overcome the complexity of all possible outcomes from strategic interactions?
Think about the "what ifs?" separately
Employers use educational background and degrees obtained to indicate an applicant's:
productivity and certain traits.
The grim trigger strategy....
punishes your rival for not cooperating
Car sellers look closely at the clothes you're wearing, the phone you carry, and other cues that might signal your _____.
reservation price
The degree of a seller's market power has an impact on the...
seller's demand curve.
Bundling is defined as
selling different goods together as a package
If the scale effect dominates the substitution effect, a decrease in the price of capital would
shift the labor demand curve to the right.
job-specific skills
skills that are only useful in a job with one particular employer
General skills
skills useful to many employers
Repeated play helps....
solve the Prisoner's Dilemna
When the government requires that a person have a license to work in a particular occupation, then in the labor market for that occupation:
supply decreases.
Labor supply curve depends on....
the balance of income and substitution effects
The first mover advantage is about....
the benefits of commitment
The second mover advantage is about....
the benefits of flexibility
marginal cost
the change in the firms cost as it produces for output
derived demand
the demand for an input derives from the demand for the stuff that input produces
extrinsic motivation
the desire to do something for its external rewards such as higher pay
Strategies to outcompete and deter new entrants:
- Demand-side: Create customer lock in - Supply-side: Develop unique cost advantages - Regulatory: Mobilize government to prevent entry - Deterrence: Convince potential entrants you'll crush them
Nash Equilibrium statements
- Each player's expectation of the other player's strategy is correct. - All players choose their best response to the strategy they expect the other player will choose - No player can do better by unilaterally changing his or her choice.
Examples of Side-Supply Barriers
- Mass Production - Relationships with suppliers resulting in less costly production factors - Learning by doing
A government may want to create barriers to sellers entering a given market for all of the following reasons:
- encouraging research and development by offering patents on new inventions and technologies. - ensuring that sellers provide products and services that are safe for consumers. - keeping average cost low when there is a natural monopoly.
All the following are forms of showing the seller that you are a savvy buyer with a low reservation price:
- never indicating how much you love the product you may buy. - making it clear that you are willing to shop around. - spending a long time negotiating.
All of the following are examples of hurdles:
- selling an inferior good cheaper than the more expensive version without imperfections. - releasing a cheaper version at a later date. - giving worse service to normal customers.
The negative outcomes of market power include all of the following:
- smaller quantity. - higher costs. - larger profits.
What careers are part of a "winner-take-all" market?
-Athlete -Actor -Author
What are the three key ideas helping you shape your segmentation strategy?
-Base group discounts on difficult-to-change characteristics. -Segment your market into groups whose demand differs. -Target your group discounts based on verifiable characteristics.
Labor Demand Shifters
-Changes in demand for your product -Changes in the price of capital -Better management and productivity gains -Nonwage benefits, subsidies, and taxes
Factors that shift labor supply:
-Changing wages in other occupations -Changing number of potential workers -Changing benefits of not working -Nonwage benefits, employment subsidies, and income taxes
A successful price discrimination strategy:
-Charges higher prices to those who'll pay them -Offers selective discounts to induce new customers to buy
Wages vary due to differences in:
-Labor demand and human capital -Labor supply and compensating differentials -Institutional factors -Discrimination
Key Insights into Imperfect Competition
-Market power allows you to pursue independent pricing strategies -More competitors leads to less market power -Successful product differentiation gives you more market power -Imperfect competition among buyers gives them bargaining power -Your best choice depends on the actions that other businesses make
Sources of discrimination:
-Prejudice -Implicit bias -Statistical discrimination
Price discrimination is only feasible if:
-Your business has market power -You can prevent resale -You can target the right prices to the right customers
All of the following are forms of group pricing discrimination:
-an internet company charging lower prices for residential than for business service. -a hairdresser charging more for women's haircuts than for men's. -books being cheaper in India than in the United States.
Mass production can lower the... This favors.....
...average cost of production ...big producers
Check mark method
If you put a check mark next to each players' best response, then an outcome with a check mark from each player is a Nash equilibrium
4 steps for making good decisions
1. Consider all the possible outcomes 2. Think about the "what ifs" separately 3. Play your best response 4. Put yourself in someone else's shoes
3-Step Recipe
1. Is the labor supply or labor demand curve shifting? (Or both?) 2. Is that shift an increase or a decrease? 3. How will wages and the number of jobs change in the new equilibrium?
Strategic Plan
A list of instructions that describes exactly how to respond in any possible situation
Monopolistic Competition
A market with many small businesses competing, each selling differentiated products
Oligopoly
A market with only a handful of large sellers Ex: Wireless data market
One-shot game
A strategic interaction that occurs only once
Payoff table
A table that lists your choices in each row, the other player's choices in each column, and so shows all the possible outcomes, listing the payoffs in each cell
Signal
An action taken to credibility convey information that is hard for someone else to verify
Collusion
An agreement by rivals to not compete with each other, but to all charge high prices instead
Nash Equilibrium
An equilibrium in which the choice that each player makes is a best response to the choices the other players are making
Switching costs
An impediment that makes it costly for customers to switch to buying from another business
How does marginal revenue compare to price for a seller with market power?
Beyond the first unit sold, marginal revenue is below price.
Look forward
In games that play out over time, you should look forward to anticipate the likely consequences of your choices
What's a possible drawback with using high-powered incentives?
Incentives can distort effort.
Perfect Price Discrimination
Charging each customer their exact willingness to pay (reservation price).
The discount effect facing companies in perfectly and imperfectly competitive markets?
Companies in perfect competition DO NOT face it. Companies in imperfect competition DO face it.
Average cost
Cost per unit, calculated as your firm's total costs (including fixed and variable costs) divided by the quantity produced
Rational Rule for Employers
Hire more workers if the marginal revenue product is greater than (or equal to) the wage
When a retailer varies price on items in ways that require buyers to spend extra time or effort to get a lower price, the retailer is using what to price discriminate?
Hurdle method
grim trigger strategy
If the other players have cooperated in all previous rounds, you will cooperate. But if any player has defected in the past, you will defect.
How does a useful signal help employers?
It helps to figure out which workers are likely to be more productive.
Barriers to entry
Obstacles that make it difficult for new firms to enter a market
When young people choose to spend more leisure time playing videogames, what would happen to the labor market for young people?
Wage will increase, and fewer jobs will be available.
What is determined by the intersection of the downward-sloping labor demand curve and the upward-sloping labor supply curve?
Wages and employment
Coordination game
When all players have a common interest in coordinating their choices
Free entry
When there are no factors making it particularly difficult or costly for a business to enter or exit an industry
Monopoly
When there is only one seller in the market
Imperfect Competition
When you face at least some competitors and/or you sell products that differ at least a little from your competitors.
finitely repeated game
When you face the same strategic interaction a fixed number of times
Repeated game
When you face the same strategic interaction with the same rivals and the same payoffs in successive periods
Strategic Interaction
When your best choice may depend on what others choose, and their best choice may depend on what you choose.
Rational rule for workers
Work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure
Rational Rule for Entry
You should enter a market if you expect to earn a positive economic profit, which occurs when the price exceeds your average cost
If you cannot prevent resale of your good, which of the following occurs when attempting price discrimination?
You'll end up selling large quantities at a low price.
The adoption of new technologies involves _____ because your best response is to use a system that is _____ whatever system your suppliers and customers use.
a coordination game; compatible with
Quantity discounts are:
a form of hurdle pricing, where the hurdle that gets you a discount on additional units of a good is buying one (or more) initial units of the good.
Efficiency wage
a higher wage paid to encourage greater work productivity
If both players know that they won't interact after the last period, their last round will be equivalent to _____, and both players will likely _____.
a one-shot game; defect
Prisoner's Dilemma
a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
prejudice
a preconceived bias against a group that's not based on reason or experience
You will go to a party if your friend decides to go with you. This is an example of:
a strategic interaction.
When a game has multiple Nash equilibria, the game will be considered...
an anti-coordination game
When you don't price discriminate, all of the following apply
any discount you give to get an extra sale also applies to all of your existing customers. the discount effect applies to the situation. this lost revenue reduces your marginal revenue substantially.
Perfect Competition and Monopoly are....
both rare
An airline company wants to charge high prices to business travelers while charging lower prices to leisure travelers because _____ travelers typically have higher reservation prices, while _____ travelers are price sensitive.
business; leisure
pay-for-performance examples
commissions, piece rates, bonuses, promotions
Despite advances in price discrimination through tools like big data, perfect price discrimination remains difficult because of:
concerns over fairness and ethical issues.
When rivals collude to raise prices, they....
increase their profits
A(n) _____ in demand for the product you sell will increase the labor demand of your business and shift the labor demand curve to the _____.
increase; right
New education funding designed to make college more affordable will shift the labor supply curve to the left because it...
increases the benefit of not working.
Price discrimination _____ the quantity you sell by _____.
increases; offering selective discounts
In order for education to work as a signal for a company:
it must be less costly for highly productive workers to earn a college degree than it is for less productive workers.
implicit bias
judgements shaped by the unconscious attribution of particular qualities to specific groups
Average cost is the dominant factor in determining prices in the...
long run
A seller's demand curve summarizes its _____, and its marginal revenue curve measures its _____.
market power; incentive to increase production
monopsony power affects whether....
minimum wages hurt employment
Explicit Costs
out-of-pocket costs for a firm—for example, payments for wages and salaries, rent, or materials
In a competitive labor market, the employers...
pay the market wage
An employer who discriminates in hiring based on prejudice may end up....
paying a higher wage for a less productive employee
Collusion is a...
prisoner's dilemna
Labor supply
the time your spend working in the market
Accounting profit
the total revenue a business receives, less than its explicit financial costs = Total revenue - explicit financial costs
Economic profit
the total revenue a firm receives, less both explicit financial costs and the entrepreneur's implicit opportunity costs =Total revenue - Explicit financial costs - Entrepreneur's implicit opportunity costs
Selective discounts help solve...
the underproduction problem
Multiple equilibria
when there is more than one equilibrium
Indefinitely Repeated Game
when you face the same strategic interaction an unknown number of times
Anti-coordination game
when your best response is to take a different (but complementary) action to the other player