Microeconomics Test 2

Define dominant strategy

one that yields a higher payoff no matter what the other players in a game choose.

A seller's supply curve shows the seller's:

opportunity cost of producing an additional unit of output at each quantity.

Define explicit costs

payments firms make to purchase. ex: resources (labor, land, etc.) (accounting costs)

What does a payoff matrix show?

payoffs and combinations of strategies.

The demand curve for a perfectly competitive firm is

perfectly elastic, while the demand curve for a monopolist is downward-sloping.

Define price discrimination

the practice of charging different buyers different prices for essentially the same good or service.

Generally, economic profit motivates firms to enter an industry....

while economic loss motivates firms to exit an industry.

For a given seller, the accompanying figure shows the relationship between the number of units produced and the opportunity cost of producing an additional unit of output. Determine how many units would this seller produce at a given price.

$ 6 per unit = 300

Refer to the figure below. If Cory chooses A, what is Jess's best response?

(What is better for Jess?) Jess benefits from B, because she will receive more.

The figure below shows the supply and demand curves for oranges in Smallville. At the price of $4 per pound, sellers offer ______ pounds of oranges per day, and buyers want to purchase ______ pounds of oranges a day.

10 ; 30

Define price ceiling and know the characteristics of price ceilings set above and below equlibrium.

A government-imposed limit on the price charged for a product. When set below equilibrium, there will be a excess demand or supply shortage. When set above equilibrium, there will be excess supply or surplus.

Define the invisible hand

Adam Smith's theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources.

What happens to the industry supply curve when more firms enter an industry?

As more firms enter, the supply curve will increase to the right.

As price increases, how do firms in a perfectly competitive market react?

As price increases, firms will increase production. (quantity)

Which of the following statements is true for both Microsoft and a locally owned restaurant?

Both seek to maximize profits.

Consider the accompanying payoff matrix. If Column Cruises offers reduced rates, and Row Resorts keeps its rates high, what will each company earn?

Column Cruises offers reduced rates and Row Resorts keeps rates high - 10 for Row and 500 for Column

What is the most important challenge facing a firm in a perfectly competitive market?

Deciding how much to produce. (Quantity)

Refer to the accompanying figure. When this market is in equilibrium, total producer surplus in the market is ___ per day.

Equilibrium = 1/2 BH (right triangle) 1/2 (25)(20) = 250

Suppose Lando Calrissian owns a smuggling business whose total revenue is $30,000 per month. The accompanying table shows Lando's monthly expenses. If Lando weren't a smuggler, he would earn $6,000 per month working for the Rebel Alliance. Apart from pay, Lando is indifferent between working as a smuggler and working for the Rebel Alliance. In the long run, what we would expect Lando to do?

Expenses [fuel + maintenance + weapons + bribes] Revenue - Expenses 30000 - 25000 = 5000 We would expect Lando to work for Rebel Alliance because he would earn $6000 a month, instead of $5000.

Consider the accompanying payoff matrix. If Row Resorts offers reduced rates, what action does Column Cruises need to take to receive highest payoff?

Find Row Resorts "Offers Reduced Rates," and see what box has higher amount for Column. 50 for Row 50 for Column

Suppose the accompanying figure shows the demand curve, marginal revenue curve, and marginal cost curve for a monopolist. This monopolist maximizes its profit by producing ___ textbooks per week and charging a price of ____ per textbook.

Go to equilibrium and find quantity. Go up to demand curve and find price. 100 ; $80

Define economic rent

The part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor.

What is the primary objective of most private firms?

To maximize profit. (Make money)

Refer to the table below. Suppose all firms in this industry have identical costs to this firm and are producing 15 units of output. What is likely to happen?

Total Revenue - [explicit+ implicit] 75 - [63+6] = $6 economic profit More Suppliers. Resources flow into market.

Tracy and Amy are playing a game in which Tracy has the first move at X in the decision tree shown below. Once Tracy has chosen either the top or bottom branch at X, Amy, who can see what Tracy has chosen, must choose the top or bottom branch at Y or Z. Both players know the payoffs at the end of each branch. In the equilibrium this game, what will each player choose?

Tracy knows Amy will always choose the top branch, so Tracy will earn 25. If she chooses the bottom branch, she will earn 75. Tracy chooses the bottom branch, and then Amy will choose her best option. (150)

When should a decision tree be used as a model?

When timing matters.

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. How many hours a day should John spend cleaning windows?

[7-0]=7 * 2 = 14 [11-7]=4 * 2 = 8 [14-11]=3 * 2 = 6 2 Hours

Define prisoner's dilemma

a game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy.

Define credible threat

a threat to take action that is in the threatener's interest to carry out.

Define monopolistically competitive firm

an industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another.

Define oligopoly

an industry structure in which a small number of large firms produce products that are either close or perfect substitutes.

If there is excess demand in a market, there is

an opportunity for mutually beneficial trades.

Define purpose of patents

encourage innovation and recover costs of R&D (research & development)

If a perfectly competitive firm can sell each unit of output for $9, and the marginal cost of the last unit produced is $8.50, then the extra benefit of the last unit produced is

greater than the extra costs. (is the firm making money? yes, $0.50.

Define network economies and know examples.

occur when the value of the product increases as the number of users increase. ex: blu-rays vs dvds, telephones, Windows op. system, eBay, Facebook and Instagram

Define marginal revenue

the change in total revenue that results from a one-unit change in output.

Define pure monopoly

the only supplier of a unique product with no close substitutes.

Define implicit costs

the opportunity costs of the resources supplied by the firm's owners. (non-monetary)

What are the three elements of a game?

the players, the strategies, the payoffs each player receives for each possible combination of strategies.

Define the hurdle method of price discrimination and know examples.

the practice by which a seller offers a discount to all buyers who overcome some obstacle. ex: discounts for identifiable groups. AARP, students