ECON 2005 Exam 3
alternate versions; hurdles
Charging more for fast shipping than for slower shipping is an example of a retailer using _____ to create _____. A) alternate versions; hurdles B) timing; growth in demand C) timing; lower average costs D) alternative versions; higher average costs
Market segmentation
Dividing the market into smaller segments of buyers
Finitely repeated
Faces the same strategic interaction a fixed number of times
inefficient
Firms are ________ when they have market power
Problems evaluating payoffs
Focusing illusion, Loss aversion
Income effect
Leads to a negative relationship between wages and the number of hours worked
Substitution effect
Leads to a positive relationship between wages and the number of hours worked
Diversification
Reducing risk by combining a large number of small risks whose outcomes are not closely related
How to solve coordination games
Regulations, focal points, and communication
corruption
Sticks and carrots often times lead to _______________
Collusion
When firms work together and split the revenue. This is illegal
Compensating differentials
Workers need to earn more to be willing to accept dangerous working conditions
Anchoring bias
tendency to begin with an anchor, or starting point and insufficiently adjust from there
Overconfidence
tendency to overrate the accuracy of your forecasts
Yes
Do barriers to entry allow monopolies
Nash equilibrium
Each firm uses its best strategy when given what they think the other company might do
Representativeness bias
Ex. "Judging a book by its cover"
Group Pricing
Ex. Children get cheaper meals or elderly get 3 dollars off on Tuesday night movies
Anchoring bias
Ex. Lead to overestimating some probabilities and underestimating others
Perfect Price Discrimination
Ex. Two identical cars may sell for different prices
Availability bias
Ex. We remember Hollywood stars but not the people who go to Hollywood and don't quite make it
Loss Aversion
Exists when a person places more value on avoiding losses than attempting to realize gains
firms will enter the market.
If Tommy's Tank Tops is a perfectly competitive firm and is currently making positive economic profits of $1,000: A) individuals will demand more tank tops. B) firms will enter the market. C) individuals will demand fewer tank tops. D) firms will exit the market. E) the market supply curve will shift to the left.
diseconomies of scale
If a firm's long-run average total costs increase as it increases its scale of production, the firm is experiencing: A) increasing returns from specialization. B) economies of scale. C) constant returns to scale. D) diseconomies of scale. E) diminishing marginal product.
remain in the industry.
If monopolistically competitive firms are making zero economic profit, then these firms would: A) make demand more inelastic. B) charge higher prices. C) leave the industry. D) begin to collude illegally. E) remain in the industry.
Coordination games
In these games you will see when you look at the boards, the boards are going to have at least two boxes that check off as the best choice for both players
Prisoners' Dilemma
Often occur when oligopoly companies try to outsmart their competitors to achieve the best outcome
Markup
One source of economic inefficiency from monopolistic competition is: A) less variety for consumers. B) markup. C) more variety for consumers. D) higher costs because firms can enter the industry. E) lower marginal costs but higher average costs than with perfect competition.
A firm expands output until marginal revenue is equal to marginal cost
Profit maximization occurs when: A) a firm expands output until marginal revenue is exceeded by marginal cost. B) total costs equal total revenue. C) a firm expands output until marginal revenue is equal to marginal cost. D) a firm sets the price at a point above average total cost. E) the price in the market is equal to the firm's marginal revenue.
Bounded Rationality
Proposes that although decision-makers want a good outcome, either they are not capable of performing the problem solving or inclined to do so. Happens whenever consumers make decisions without perfect information.
Copyright
Protection of written material by the government which assures with the creator that no one else can play or sell their work without artists permission
Sticks
Punish poor performance. Ex. Bottom 10 percent of employees each year would get fired
Perfect Rationality
Rational decision making. Costs = benefits
Carrots
Reward good performance. Ex. Top 20 percent get bonus
a general skill that could be used in any job for any employer.
Some employers are willing to provide job training for workers. However, an employer might require the worker to pay for the training when the training is: A) of short length. B) a general skill that could be used in any job for any employer. C) specific to the employer. D) provided by a manager in the firm. E) extensive.
Second mover advantage
Strategic advantage that can follow from taking an action that adapts to your rival's choice
Social Welfare
Studies how the distribution of income, resources and goods affects the economic well-being
Focusing illusion
Tendency to mis-predict your utility by focusing on a few factors at the expense of others
Marginal product of labor
The additional output the firm receives from employing one additional worker
Consumer optimum
The combination of goods and services that maximizes utility for a given income. Deals with utility maximization and scarcity
Conditions for price discrimination
The company can identify how much each customer is willing to pay, The product cannot be resold, The company has market power
Derived demand
The demand for factors of production dependent on consumer demand for output
Markup
The difference between the price the firm charges and the marginal cost of the product. Price > marginal cost
timing; a hurdle
The early bird specials at many restaurants are an example of using _____ to create _____. A) difficult-to-change characteristics; a hurdle B) alternate versions; lower marginal costs C) timing; a hurdle D) alternate versions; marginal benefit
Patents
The firm that exists in the market has created a new product and the government is allowing them time to be the sole producer of that product
Union
The organization of workers into a single group for the purpose of acting as a single voice for the workers. They drive up wages in an industry and decrease demand for labor at the higher rate
Gathering information
The value of information is greater the more it reduces uncertainty and the higher the stakes involved in the decision
Perfect Price Discrimination
When a firm charges the maximum amount that buyers are willing to pay for each unit. Make every possible sale when there's a customer whose marginal benefit exceeds sellers marginal cost
Group Pricing
When firms charge people different prices based on observable attributes that determine the consumer's willingness to pay
Cartel
When firms collude they become part of a __________
Licensing
When firms enter the market they are limited in entering the market because the government must issue them a license to operate which usually take a lot of time and money to get
Strategic interaction
When your best choice may depend on what others choose and what they choose may depend on what you choose
wages for employees
Which of the following is the best example of a variable cost in the short run? A) rent for factory space B) rent for a restaurant C) wages for employees D) debt payments for a loan E) rent for an office
First mover advantage
Will always use second backward induction and can be more aggressive
Efficiency wage theory
Would suggest that an employee should receive a wage higher than the equilibrium wage rate
Underproduction
_____ is a problem in markets where companies exercise market power and it is resolved when companies practice price discrimination. A) Excess profits B) Excess costs C) Overproduction D) Underproduction
Looking forward
anticipate the likely consequences of choices
Natural barriers to entry
A firm controls the resources that go into creating the product of the market, Problems raising capital, Economies of scale
Includes psychological factors in assessing how people make economic decisions.
A firm has a certain amount of capital and land. As it hires more labor, each worker is able to A) replaces emotion with factual analysis. B) includes psychological factors in assessing how people make economic decisions. C) explains human behavior by tying it to economic principles. D) uses principles of animal behavioral training to train human behavior
factors of production.
A firm's inputs are also known as its: A) costs. B) profits. C) outputs. D) factors of production. E) revenues
Simultaneous game
A game where each player chooses their action without knowledge of the actions chosen by other players
Strategic plan.
A list of instructions that describe exactly how to respond in any possible situation is a: A) payoff chart. B) strategic plan. C) check list. D) game tree.
Behavioral economics
Accounts for the impulsive actions of humans making decisions
Hedge
Acquire an offsetting risk. Ex. Clorox wipes and COVID 19
This practice prevents a passenger who purchased a discounted fare from reselling that ticket to another customer who is willing to pay more
Airlines require every passenger with a ticket to have a matching government-issued photo identification. Price discrimination is made easier because: A) this type of price discrimination is mandated and supported by the federal government. B) customers acknowledge that they are exchanging higher ticket prices for decreased safety regulations. C) this practice allows airlines to determine the different personal characteristics of their buyers at a zero cost. D) customers are then willing to divulge relevant information to the airline about their reservation price. E) this practice prevents a passenger who purchased a discounted fare from reselling that ticket to another customer who is willing to pay more.
Actuarially fair
An insurance policy that, on average, is expected to pay out as much in compensation as it receives in premiums
Problems assessing availability
Availability bias, Anchoring bias, Representativeness bias, Overconfidence
Economies of scale
Basically says that the firm that is already can create the product better than any other firm entering market
The market demand curve.
Christopher's Campground is the only campground located in Abilene, Texas. Christopher's Campground's demand curve is: A) perfectly inelastic. B) perfectly elastic. C) horizontal. D) upward-sloping. E) the market demand curve.
Factors of production
land, labor, and capital
Substitution effect
occurs when a consumer buys more of a good as a result of a relative price change
Grim trigger
punish rivals who do not cooperate
Mutual interdependence
the actions of one firm have an impact on the price and output of its competitors
Price discrimination
the practice of charging different prices to different buyers
Representativeness bias
the tendency to assess the likelihood that something belongs in a category by judging how similar they are to that category
Availability bias
the tendency to overestimate the frequency of events that are easily recalled and to underestimate the frequency of less memorable events
Risk Spreading
transforming big risks into small risks to be spread over many people
Monopsony power
when there is only one buyer in a market
Diseconomies of scale
forces that may eventually increase a firm's average cost as the scale of operation expands in the long run
Economies of scale
forces that reduce a firm's average cost as the scale of operation expands in the long run
Fair bet
gamble that, on average, will leave a person with the same amount of money.
Hurdle Method
Firms offer lower prices only to those buyers who are willing to overcome some hurdle or obstacle
Government barriers to entry
Licensing, copyright, patents
Pay for Performance
Linking the income the worker earns to measures of their performance
Rent seeking
Lobby Congress, state legislatures to help them create a stronger monopoly to help them create more profit. Leads to an undesirable outcome
Why firms price discriminate
Make additional profits, Underproduction problem is solved, Uses goods more efficiently
Economic Profits
Total Revenue - All costs (including opportunity costs)
Accounting Profit
Total Revenue - Explicit Costs
Workers need to earn more to be willing to accept dangerous working conditions.
Using a compensating differential wage theory, why do some individuals earn more than others? A) Workers who earn more are more productive. B) Workers need to earn more to be willing to accept a safe indoor job. C) Workers who are more educated and better trained are able to earn more than the equilibrium wage. D) Workers need to earn more to be willing to accept dangerous working conditions. E) Workers who earn more tend to be concentrated in a single occupation.
Market failure
Wasting resources, not producing as much as they can or should have to benefit maximum number of members in society