Principles of Microeconomics Part 2

Collusion

an agreement between rival firms that specifies the price each firm charges and the quantity it produces.

Government regulation of prices in the bottled water industry may not benefit consumers because it is a ______________. Although __________ might increase because of government regulation in the short run, in the long run many companies would likely _____. If so, this would harm consumers because they would have less convenience and fewer options.

monopolistically competitive, efficiency, close Explanation: The government would have to subsidize many of the surviving firms if it chose to regulate monopolistically competitive industries.

In order to get the opportunity cost of something,

divide the opposite product output by the product's output whose opportunity cost you are finding. For example the opportunity cost of B is A/B

If a nation exports a good when the economy is open to trade, relative to the autocracy price, the domestic price of the goodwill _____ and domestic consumption will _____.

rise; fall

The difference between a nation's total exports and total imports is its

trade balance.

There are three types of people who take risk: Risk-averse, risk-neutral, and risk-takers. Which type prefers a sure thing over a gamble with a higher expected value? In other words, they only take the risk if there's a 90% chance at success.

Risk-averse

How is price discrimination practiced?

*Under price discrimination, some consumers pay a higher price and others receive a discount.

What are three types of product differentiation?

*Vertical: when two products are similar but priced differently. If both products are priced the same, one would be considered better than the other due to quality. *Horizontal: occurs regardless of a product's quality or price point. The product is chosen based on the consumer's personal preference. *Mixed: A consumer may choose a new car from the same class of a vehicle and consider the price points of different brands. (mixed)

Where does the demand for labor come from?

- The demand for each factor of production is derived demand that stems from a firm's desire to supply a good in another market. Labor demand is contingent on the value of the marginal product that is produced, and the value of the marginal product is equivalent to the firm's labor demand curve

Why is product differentiation necessary for monopolistic competition?

By differentiating its products, firms in a monopolistically competitive market ensure that its products are imperfect substitutes for each other. As a result, a business that works on its branding can increase its prices without risking its consumer base.

Since there are only two firms in a small area.

Both firms were built to service all of the customers in the town, so each have an excess capacity when the customers are divided.

Is globalization good or bad?

Both! Can be good for some, may be bad for others

What happened to AT&T?

Broken up into seven new companies, five of which have since merged.

Which of these groups would be indifferent between the tariff and the quota?

Buyers/ Domestic buyers Domestic Producers

Which of the following decision-making strategies is just as good as maximizing the ratio MU/Price? A) Maximizing total utility purchased B) Maximizing the difference MU - Price C) Minimizing the ratio Price/MU D) Minimizing total Money spent

C) Minimizing the ratio Price/MU

Conditions for Price Discrimination

Distinguishing Groups of Buyers and Preventing Resale

What are two benefits of free trade due to increased competition?

Domestic firms become more innovative AND Consumers have more options to choose from.

This occurs when a foreign supplier sells a good below the price it charges in its home country. It is often a deliberate effort to gain a foothold in a foreign market. It can also be the result of subsidies within foreign countries.

Dumping

Competitive markets: price is $0, output is 1,200, and they are socially efficient because the marginal cost of providing cell phone service is zero, the price is eventually driven to zero. Since firms are in business to make a profit, it is unrealistic to expect this result.

Duopoly: Price is between $0-90, output is between 600-1200, and the only time it is socially efficient is when the price and output is the same as competitive markets. This is because firms are mutually interdependent, each adopts a strategy based on the actions of its rival. The two firms may decide to collude and charge $90, or competitive pressures may lead them to charge a much lower price.

This situation arises when a leading role entrusts an agent to complete a task and the agent does not do so in a satisfactory way.

Principal-agent problem

Robert Axelrod

Prisoner's Dilemma strategy survey concluding that cooperation is the dominant strategy. Repeated interaction encourages positive reciprocity, and ultimately cooperation. (tit for tat)

How is diminishing marginal utility reflected in the law of demand?

The law of diminishing marginal utility states that marginal utility declines as consumption increases.

Jennifer runs a landscaping business. She is about to buy a new mower that she expects will last her three years. Compared to model A, which is similar to the mower Jennifer is currently using, model B costs $1,500 more but will save about $200 in gas each year. It will also allow her to earn $10 more each week because it mows faster, which allows her to work on more lawns. Which model should Jennifer buy, and why?

The lawnmower will save $600 ($200 x 3)in gas over three years and Jennifer will collect $520 more in payments each year. (52 weeks in 1 year). The total of $2,160 is $660 more than the $1,500 cost premium of the better model.

If the price drops, the firm's total profit falls because

The loss in revenue due to the price effect exceeds the gains in revenue due to the output effect. Also, the new price and output level are at a point where MR < MC

Punch Pizza is a small upscale chain in Minnesota that uses wood-fired ovens. In contrast, Pizza Hut is a large national chain. Which pizza chain would have a greater markup on each pizza.

The marginal cost of making pizza at both places consists of the dough, the toppings, and wages for labor. At Pizza Hut, pizza assembly is streamlined for efficiency. Punch Pizza is more labor intensive, but its marginal cost is relatively low. The prices at Punch Pizza are much higher than at Pizza Hut.

What is the relationship between total utility and marginal utility?

The marginal utility is the amount of utility gained or lost with additional utils.

The consumer optimum for consuming two is achieved when

The marginal utility per the last dollar spent is equal to that of every other item purchased.

Compensating differential

This is the difference in wages offered to offset the desirability or undesirability of a job.

occupational crowding

This is the phenomenon of relegating a group of workers to a narrow range of jobs in the economy.

Product differentiation

This is the process firms use to make a product more attractive to potential customers.

Excess Capacity

This occurs when a firm produces at an output level smaller than the output level needed to minimize average total costs.

Winner-take-all

This occurs when extremely small differences in ability lead to sizable differences in compensation.

Income effect

This occurs when laborers work fewer hours at higher wages, using their additional income to demand more leisure.

substitution effect

This occurs when laborers work more hours at higher wages, substituting labor for leisure.

Diminishing Marginal Utility

This occurs when marginal utility declines as consumption increases.

wage discrimination

This occurs when workers with the same ability as others are not paid the same because of their race, ethnic origin, sex, age, religion, or some other group characteristic.

Diamond-Water Paradox

This paradox explains why water, which is essential to life, is inexpensive, while diamonds, which do not sustain life, are expensive.

Bounded rationality

This proposes that although decision-makers want a good outcome, either they are not capable of performing the problem solving that traditional economic theory assumes, or they are not inclined to do so.

Behavioral economics

This type of economics focuses on the field of economics that draws on insights from experimental psychology to explore how people make economic decisions.

hot hand fallacy

This type of fallacy is the belief that random sequences exhibit a positive correlation (relationship).

Gambler's Fallacy

This type of fallacy is the belief that recent outcomes are unlikely to be repeated and that outcomes that have not occurred recently are due to happen soon.

A natural monopoly occurs when

This type of monopoly occurs when a single large firm has lower costs than any potential smaller competitor.

Sherman Antitrust Act of 1890

This was the first federal law limiting cartels and monopolies.

Licensing

To minimize negative externalities, governments occasionally establish monopolies through licensing requirements.

Monopolistic Competition Characteristics

Product differentiation Many buyers and sellers Low barriers to entry/exit Non-price competition (e.g. marketing) Firms profit maximize

Prospect Theory/Loss Aversion

Prospect theory claims that people tend to weight losses/risks more than gains when making decisions, therefore, they tend to choose the option that is framed in the way that helps to avoid losses or risks.

This is a blanket term for governmental actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition.

Protectionism

Budget Constraint Equation

PxX + PyY = I (Px = price of X, X = quantity of X consumed, Py = price of Y, Y = quantity of Y consumed, I = household income)

When the price drops, _____ slowly becomes more _____. The _____ effect diminishes and the _____ effect increases. As the _____ falls, it becomes harder for the firm to acquire enough new customers to make up for the difference in lost _____.

Revenue, price (2), output, inelastic, demand

Lilly Ledbetter Fair Pay Act

U.S. act that creates a rolling time frame for filing wage discrimination claims and expands plaintiff field beyond employee who was discriminated against.

This is an economic experiment in which two players decide how to divide a sum of money.

Ultimatum game

price effect

after a price increase, each unit sold sells at a higher price, which tends to raise revenue. Whenever the price drops, the marginal revenue curve lies below the demand curve.

Poverty Threshold

an income level below that which is needed to support families or households.

Generally, as the number of firms grows, each individual firm becomes less concerned about its impact on the overall price, because

any price above marginal cost creates a profit.

Barriers to entry

are restrictions that make it difficult for new firms to enter a market.

Indifference curves are best seen

as approaching the maximization point from all directions.

What happened to Standard Oil?

broken up into 34 independent companies

Caveat emptor means

buyer beware

Income Inequality Ratio

calculated by dividing the top quintile's income percentage by the bottom quintile's income percentage

The final type of premium payment is ___________ payments, a percentage the insured pays after the insurance policy's deductible is exceeded up to the policy's contribution limit.

coinsurance payments

By choosing an option with a higher indifference curve, the consumer will be maximizing his or her utility, given the budget. This is known as a) maximization point b) consumer optimum

consumer optimum

The _____ serves to prevent most people from seeking care for common conditions that are easy to treat at home

copay

Oligopoly Characteristics

few sellers and differentiated products, and significant barriers to entry High start-up production costs Patent Protection of products

decision tree

illustrates all of the possible outcomes in a sequential game

There are over 500,000 medical facilities in this country, including small medical offices, large regional hospitals, nursing homes, pharmacies, and stores that supply medical equipment.

in addition, pharmaceutical companies generate over $300 billion in annual sales in the United States.

effects of price discrimination

increases firm profit increases quantity the firm produces decreases deadweight loss reduces consumer surplus increases producer surplus

Higher wages

makes leisure time more expensive because the opportunity cost of enjoying more leisure means giving up more income.

Sources of inefficiency in monopolistic competition

markup & higher average total cost.

The _______________ is the point at which a certain combination of two goods yields the greatest possible utility.

maximization point

Consumers will optimize their utility by

maximizing the marginal utility per dollar spent.

Advertising causes a _______________ whereby no individual firm can easily gain market share but feels compelled to advertise to protect its customer base.

negative business-stealing externality

What happened to ALCOA?

not broken up

It is ____ for individual firms in competitive markets to invest in advertising because they sell _________. Advertising in this market increases _ without directly influencing sales. However, _______ will still advertise to increase demand for the common product.

not productive, an undifferentiated good, costs, an industry as a whole.

perfect price discrimination

occurs when a firm sells the same good or service at a unique price to every customer.

Price discrimination

occurs when a firm sells the same good or service at different prices to different groups of customers.

outsourcing of labor

occurs when a firm shifts jobs to an outside company, usually overseas, where the cost of labor is lower.

Predatory pricing

occurs when firms deliberately set their prices below average variable costs with the intent of driving rivals out of the market.

The Backward-Bending labor supply curve

occurs when workers value additional leisure more than additional income

capital intensive

the amount of capital invested so as to increase the revenue and profit

labor intensive

the amount spent on training to labor so as to increase the efficiency of labor which will ultimately result in the increased production.

Consumer Optimum

the combination of goods and services that maximizes the consumer's utility for a given income or budget

value of the marginal product

the marginal product of an input times the price of the output

Comparative advantage of A goes to

the one with the lowest opportunity cost of A.

Poverty Rate

the percentage of people who live in households with income below the official poverty line. *The United States has many highly successful workers and a poverty rate similar to those found in other highly developed countries.

status quo bias

the preference to keep things the way they are rather than change. This bias leads decision-makers to try to protect what they have, even when an objective evaluation of their circumstances suggests that a change would be beneficial.

At high price levels --- where demand is elastic

the price effect is small relative to the output effect

If we think of consumer desire for a particular product as demand, it makes sense to find a connection between _____________,_________________, and ____________.

the prices consumers pay, the quantity they buy, and the marginal utility they receive.

backward induction

the process of deducing backward from the end of a scenario to infer a sequence of optimal actions

Budget Constraint

the set of consumption bundles that represent the maximum amount the consumer can afford.

Price effect

This reflects on how a change in price affects the firm's revenue.

What happens when additional competitors enter the market?

Price will decrease, and competitors will settle for their Nash Equilibrium.

This decision-making effect occurs when the order of the questions influences the answers.

Priming effect

Example of finding the inequality ratio: Suppose the poorest quintile of the population of Burgandy has an average disposable income of $4,000, while those in the top quintile have a disposable income of $60,800.

$60,800/$4,000 = 15.2

How do Incentives Influence the Quality of Health Care?

*A single-payer system makes the government the single buyer, or monopsonist, of most medical care. The government uses its leverage as a monopsonist to set compensation levels for providers below the competitive market wage rate. Single-payer systems ration medical services through increased wait times, whereas private healthcare systems ration medical care through prices. *The demand for many replacement organs exceeds the supply made available each year. However, because of the National Organ Transplant Act of 1984, it is illegal to sell most organs in the United States.

Why is Advertising Prevalent in Monopolistic Competition?

*Advertising performs useful functions under monopolistic competition such as: conveying information about the price of the goods offered for sale, the location of products, and new products. It also signals differences in quality. However, advertising also encourages brand loyalty, which makes it harder for other businesses to successfully enter the market.

How do government policies affect oligopoly behavior?

*Antitrust law is complex, and cases are hard to prosecute. Nevertheless, these laws are essential in providing oligopolistic firms an incentive to compete rather than collude. *Antitrust policy limits price discrimination, exclusive dealings, tying arrangements, mergers and acquisitions that limit competition, and predatory pricing.

How does Asymmetric Information Affect Healthcare Delivery?

*Asymmetric information (adverse selection, the principal-agent problem, and moral hazard) affects incentives in healthcare delivery. Insurance companies try to structure their plans to encourage patients to seek care only when it is needed and also to seek preventive care. The companies can achieve these goals by making many preventive care visits free and establishing deductibles and copayments that are high enough to discourage unnecessary trips to the doctor or a demand for additional procedures. *Inelastic demand for many medical services, combined with third-party payments that significantly lower out-of-pocket expenses to consumers, gives rise to a serious moral hazard problem in which patients demand more medical care than is medically advisable. To solve a moral hazard problem, it is necessary to fix the incentive structure. Moral hazard explains why many insurance companies encourage preventive care: it lowers medical costs.

How Do Economists Model Consumer Satisfaction?

*By examining utility, which is a measure of the level of satisfaction that a consumer enjoys from the consumption of goods and services. *Utility diminishes with additional consumption. This property limits the amount of any particular good or service that a person will consume.

How Do Consumers Optimize Their Purchasing Decisions?

*By finding the combination of goods and services that maximizes the level of satisfaction from a given income or budget. *Changes in price have two distinct effects on consumer behavior. If prices fall, the marginal utility per dollar spent will be higher. As a result, consumers will substitute (substitution effect) the product that has become relatively less expensive. If the lower price also results in substantial savings (real-income effect), it causes an increase in purchasing power.

What are the determinants of wages?

*Compensating Differentials *Education and Human capital *Location and Lifestyle *Unions *Efficiency Wages

How do Economists Analyze Poverty?

*Economists determine the poverty rate by establishing a poverty threshold. *The poverty rate in the United States is now slightly higher than it was 50 years ago, despite many efforts to reduce it. *Efforts to reduce poverty are subject to the Samaritan's dilemma because they can create disincentives for recipients to support themselves.

How Do Economists Explain Irrational Behavior?

*Economists use a number of concepts from behavioral economics to explain how people make choices that display irrational behavior. These concepts include bounded rationality, misperceptions of probabilities, framing effects and priming effects, the status quo bias, intertemporal decision-making, judgments about fairness, preference reversals, and prospect theory. *Folding the behavioral approach into the standard model makes economists' predictions about human behavior much more robust.

The Monopolistically Competitive Firm in the Long Run

*Entry and exit cause short-run profits and losses to disappear in the long run, which means that the price charged must be equal to the average total cost of production. *At this point, firms are earning zero economic profit, as noted by P=ATC along the vertical axis. The market reaches a long-run equilibrium at the point where there is no reason for firms to enter or exit the industry.

Problems of Monopoly?

*From an efficiency standpoint, the monopolist charges too much and produces too little. Because the monopolist's output is smaller than the output that would exist in a competitive market, monopolies lead to deadweight loss. *Government grants of monopoly power encourage rent-seeking or the use of resources to secure monopoly rights through the political process.

How Does Game Theory Explain Strategic Behavior?

*Game theory helps to determine when cooperation among oligopolists is most likely to occur. In many cases, cooperation fails to occur because decision-makers have dominant strategies that lead them to be uncooperative. As a result, firms compete with price or advertising when they could potentially earn more profit by curtailing these activities. *Games become more complicated when they are played multiple times, so short-run dominant strategies often disappear.

How do Demand and Supply Contribute to High Medical Costs?

*Inelastic demand and third-party payments help explain why medical expenses have risen so rapidly. The combination of third-party payments and inelastic demand for medical care increases the quantity of medical care demanded; both factors also result in increased expenditures. As we learned previously, more demand means higher prices, all else equal.

What are the Determinants of Demand and Supply in the Labor Market?

*Labor markets bring the forces of demand and supply together in a wage signal that conveys information to both sides of the market. At wages above the equilibrium, the supply of workers exceeds the demand for labor. The result is a surplus of available workers that places downward pressure on wages until they reach the equilibrium wage, at which point the surplus is eliminated. At wages below the equilibrium, the demand for labor exceeds the available supply of workers, and a shortage develops. The shortage forces firms to offer higher wages to attract workers. Wages rise until they reach the equilibrium wage, at which point the shortage is eliminated. *There is no definitive result for outsourcing of labor in the short run. In the long run, outsourcing moves jobs to workers who are more productive and enhances overall social welfare.

What role do land and capital play in production?

*Land and capital are the factors of production across which firms compare the value of the marginal product per dollar spent. Firms seek to equalize the revenue per dollar spent on each input, thereby maximizing their efficiency.

What Are the Differences among Monopolistic Competition, Competitive Markets, and Monopoly?

*Monopolistic competitors, like monopolists, are price makers with downward-sloping demand curves. Whenever the demand curve is downward sloping, the firm is able to mark up the price above the marginal cost. The results are excess capacity and an inefficient level of output. *In the long run, barriers to entry enable a monopoly to earn an economic profit. This is not the case for monopolistic competition or competitive markets.

How much do monopolies charge, and how much do they produce?

*Monopolists are price makers who may earn long-run economic profits. *Like perfectly competitive firms, a monopolist tries to maximize its profits. To do so, it uses the profit-maximizing rule, MR=MC, to select the optimal price and quantity combination of a good or service.

examples of diminishing marginal utility: *Discounts on season tickets *Unlimited Minutes with cell phone plans *Nathan's Famous Hot Dog Eating Contest

*Over the course of any season, people anticipate some games and concerts more highly than other games and concerts. To encourage patrons to buy the entire season package, venues must discount the total price. *Cell phone companies rely on the diminishing marginal utility of conversation. Cell phone companies offer "unlimited" plans because they know that consumers will not stay on their phones indefinitely. *Many people enjoy eating a hot dog or two or three, but Nathan's Eating Contest is very difficult to watch. The idea of eating so many hot dogs makes a lot of people queasy.

What is Price Discrimination?

*Price discrimination occurs when firms can identify different groups of customers with varying price elasticities of demand and can prevent resale among their customers. *A firm must have some market power before it can charge more than one price.

Example of Price Discrimination at the Movies

*Pricing Based on the time of the show: Theaters charge two different prices based on showtime because they can easily distinguish between inelastic-demand customers and price-sensitive customers who have the flexibility to watch a matinee. *Pricing based on Age or Student Status *Concession Pricing

What is the role of risk in Decision-Making?

*Risk influences decision-making because people can be risk-averse, risk-neutral, or risk-takers. *In the traditional economic model, risk tolerances are assumed to be constant. If an individual is a risk-taker by nature, he or she will take risks in any circumstance. *Prospect theory suggests that individuals weigh the utilities and risks of gains and losses differently and are therefore willing to take on additional risk to try to recover losses caused by negative shocks.

What are the causes of persistent poverty in the United States since the 1960s?

*Technology-based automation of routine workplace tasks *Lack of skills in low-income workers

What are the important issues in the healthcare industry?

*The healthcare debate is about efficiency and cost containment. Increases in longevity and quality of life are subject to diminishing returns and require choices with difficult trade-offs. *The widespread use of insurance alters the incentives consumers and producers face when making healthcare decisions. Consumers pay premiums up front and much smaller deductibles and copayments when seeking medical care. Producers receive the bulk of their revenue from intermediaries such as insurance companies. The result is a system in which consumers demand more medical care because they are insured and many providers have an incentive to order additional tests or procedures that may not be absolutely necessary.

Where does the supply of labor come from?

*The supply of labor comes from the wage rate that is offered. Each worker faces the labor-leisure trade-off. At high wage levels, the income effect may become larger than the substitution effect and cause the labor supply curve to bend backward. Changes in the supply of labor can result from other employment opportunities, the changing composition of the workforce, immigration, and migration.

Example of Price Discrimination on Campus

*Tuition *Student Discounts

How does international trade help the economy?

-gains from trade occur when a nation specializes in the production and exchanges its output with a trading partner -each nation must produce goods for which it is a low-opportunity-cost producer and then trade them for goods for which it is a high-opportunity-cost producer -trade benefits nations' economies through economies of scale and increased international competition

The Characteristics of Monopolies

-one seller -a unique product without close substitutes -high barriers to entry -price making

What Are the Effects of Tariffs and Quotas?

-protectionism in the form of trade restrictions, such as tariffs and quotas, is common. A tariff is a tax on imports; a quota is a quantity restriction on imports. -proponents of trade restrictions often cite the need to protect defense-related industries and fledgling firms and to fend off dumping.

Calculating the Monopolist's Marginal Revenue

1) Quantity of customers: As the price goes down, the quantity of customers goes up. 2) Price of Service 3) Total Revenue 4) Marginal Revenue per # of customers.

If recent demographic studies show that 18-24-year-olds are increasingly not attending college or university and entering the workforce after high school, the supply of labor will likely ________, since there will be more people available to work and a higher labor force _____________ rate. This represents a change in the supply of labor due to ______________________________

1) increase 2) participation 3) the changing composition of the workforce.

When a stable cartel is not achieved, firms in_____ ___ ___ ___ __ ____ __. But they also do not compete to the same degree as firms in competitive __. Therefore, when a market is an oligopoly, output is ___ ___ ___ _____ ___ ___ _____ __.

1) oligopoly fall short of fully maximizing profits. 2) markets. 3) likely to be higher than under a monopoly and lower than within a competitive market.

When demand for workers in a certain profession increases, wages will ____. When employers find it _________ to find employees, workers' wages will be higher. If the supply of workers is too high wages will ____ until the market reaches equilibrium. In short, an increase in labor demand puts upward pressure on wages, while an increase in labor supply puts downward pressure on wages.

1) rise 2) difficult 3) fall

Keith will need to compare the _____ __ ___ _______________ __ _____ to the ____ he pays each employee. If the cost to hire an employee is less than the revenue that employee can produce, Keith should ________ hiring employees because he will continue to be profitable.

1) value of the marginal product of labor 2) wage 3) continue

MONOPOLISTIC COMPETITION: 1.) An ice cream parlor that makes its product on the premises operates with excess capacity. 2.) A clothing retailer charges a price $10 higher than its marginal cost to produce the clothing. 3.) A candy company produces a level of output that is smaller than the level needed to minimize average total cost. COMPETITIVE MARKETS: 4.) A manufacturer of copper wire sells its product at a price equal to the marginal cost. 5.) A lobster fisherman produces at an output level equal to the efficient scale.

1)Being able to differentiate its products allows the shop to operate with excess capacity, charge more per serving, and earn a greater profit. 2)This depends on customers having a degree of brand loyalty that keeps them from seeking the absolute cheapest comparable product. 3) Candy companies compete with each other, but are able to differentiate their products. 4) Wire is a highly generic product; there is little opportunity for differentiation and therefore the manufacturer is a price taker. 5)Efficient scale is characteristic of a competitive market.

Nadia, a rational consumer, is deciding between truffle macaroni and saffron tater tots. The macaroni would bring Nadia 15 units of utility, whereas the tater tots would bring her 18 units. If the truffle macaroni costs $55, match each price for the saffron tater tots to Nadia's decision. (Use the MU/Price strategy) 1. Nadia Orders the Macaroni 2. Nadia orders the tater tots 3. Nadia flips a coin A) $57 B) $66 C) $70 D) $60

1. C 2. A, D 3. B

Two-step process to determine the monopolist's profit

1. Locate the point at which the firm will maximize its profits: MR = MC 2. Set the price: from the point at which MR = MC, determine the profit-maximizing output, Q. From Q, move up along the dashed line until it intersects with the demand curve (D). From that point, move horizontally until you come to the y-axis. This point on the y-axis tells us the price (P) the monopolist should charge.

principal-agent problem examples

1. Parents (the principal) hire a babysitter (the agent) to watch their children, but the babysitter might talk on the phone instead. 2. A company manager (the agent) might try to maximize his own salary instead of working to increase value for the shareholders (the principal).

Bounded rationality, or limited reasoning, can be explained in three ways.

1. The information the individual uses to make the decision may be limited or incomplete. 2. The human brain has a limited capacity to process information. 3. There is often a limited amount of time in which to make a decision.

ad valorem tax

A tax levied according to value, generally used to refer to real estate tax. Also called the general tax.

The U.S. tariff on Chinese tires imposed in 2009, resulted in a drop in imports from 13 million tires to just 5.6 million tires in one quarter. In addition, within a year, average radial car tire prices rose by about $8 per tire in the United States: the average price of Chinese tires rose from $30.79 to $37.98, while the average price of tires from all other nations rose from $53.94 to $62.05. 1. Who were the winners and losers domestically from this tire tariff? 2. Who would be the winners and losers overseas?

1. The winners would be the domestic tire makers and the government since it collects the tariffs. The losers were U.S. tire consumers, who saw prices rise by about $8 per tire. 2. The winners are the producers of the tires from everywhere except China. Because this tariff was targeted at a single nation, it did not affect tire producers in other nations. Non-Chinese tire producers realized an average of $8 more per tire. The losers were Chinese tire manufacturers.

One consequence of using prices to ration medical care is that close to

35 million U.S. citizens forgo some medical care because they lack insurance or the means to pay for care on their own.

Allais Paradox

A Risk-taker would choose options 2 and 4. Not caring for the risk.

Consider two different companies. The first manufactures cardboard, and the second sells books. Which firm is more likely to advertise?

A cardboard manufacturing firm sells exactly the same product as other cardboard producers, so it has no market power, and any advertising expenses will only make its cost higher than its rivals'.

Lorenz Curve

A curve illustrating the degree of equality of income distribution in an economy. It plots the cumulative percentage of income received by cumulative shares of the population.

Price Maker

A firm with some power to set the price because the demand curve for its output slopes downward; a firm with market power.

Cartel

A group of two or more firms that act in unison.

Example of Economies of Scale as a barrier

A large rail shipping company lays down new railroad tracks in an area, but the firm will reduce it average total costs by shipping to more customers.

HMO (Health Maintenance Organization)

A managed care organization that provides comprehensive medical services for a predetermined annual fee per enrollee.

What Are Network Externalities?

A network externality occurs when the number of customers who purchase or use a good influences the quantity demanded. The presence of significant positive network externalities can cause small firms to go out of business.

What is globalization?

A process that involves the entire world and results in making something worldwide in scope.

A shift in labor creates a shortage.

A shift in labor creates a surplus.

Tariffs are taxes levied on imported goods and services.

A tariff is paid by the producer of the good when the good arrives in a foreign country.

PPO (Preferred Provider Organization)

A type of health plan that contracts with medical providers, such as hospitals and doctors, to create a network of participating providers. You pay less if you use providers that belong to the plan's network.

Which of the following explains diminishing returns in health care? A) Treatment for diseases related to lifestyle or genetics often produces only modest results. B) Healthcare resources are often in limited supply. C) Demand for health care is relatively inelastic.

A) Because health problems associated with old age are another limiting factor. It is more expensive to help an 85-year-old reach 90 than to help a 40-year-old reach 45.

Match each of the following motivations for trade restrictions to the argument against that reason. A) In practice, tariffs are often used to limit imports from friendly nations. B) Regardless of how many producers benefit from trade restrictions, even more consumers will be hurt because of higher prices. C) Well-established industries are able to lobby for trade restrictions to stay in place. 1.) National Security Interests 2.) Favors to special interests 3.) Protecting infant industries

A) National Security Interests B) Favors to special interests C) Protecting infant industries

A researcher asks you the following question: "Would you rather have a 10% chance of mortality or a 90% chance of survival?" What concept from behavioral economics is illustrated here? What is the difference between the two choices, if any? Which choice do you think most people make?

According to traditional economics, how the question is framed should not matter. But behavioral economics correctly predicts that it does: when asked to choose which of the two outcomes they prefer, a significant majority chooses "a 90% chance of survival," even though this statement is equivalent to "a 10% chance of mortality."

This happens when one party has information about some aspect of product quality that the other party does not have. For example, A car salesman knows that he has a faulty car, which is worth $1,000. However, the customer has no idea bout these faults.

Adverse Selection

There are two forms of asymmetric information: Adverse Selection, Contrary Selection, General Selection, or Principal-agent problem.

Adverse Selection and Principal-agent problem

Which of the following age groups earns the highest median salary?

Ages 55-64: On average, though late-career workers have fewer incentives to become familiar with the newest technologies, these workers often earn the highest median salaries.

Earned Income Tax Credit

Also known as the EITC, is a tax credit designed to encourage low-income workers to work more. At very low income levels, EITC offers an incentive to work by supplementing earned income with a tax credit of approximately $6,000 a year. *The amount is determined by the number of dependent children in the household and the location. Once a family reaches an income level above its earnings threshold, EITC is phased out, and workers gradually lose the tax credit.

If no one can live without groceries, then why do they cost less than big-screen TVs that no one really needs?

Although demand is higher for groceries than for TVs, supply is much greater for groceries.

Example of substitution effect

Amy decides the opportunity cost of taking time off work is too high for her.

Antitrust laws

An attempt to prevent oligopolies from behaving like monopolies.

OECD Better Life Index

An index to compare well-being across countries, based on 11 topics that the OECD has identified as essential, in the areas of material living conditions and quality of life. The 11 topics are: *Housing, *Health, *Income, *Life Satisfaction, *Jobs, *Safety, *Community, *Work-Life Balance, *Education, *Civic Engagement, and * Environment.

What are duopolies?

An industry consisting of only two firms.

Result of mutual interdependence

As a result, a firm's market share is determined by the products it offers, the price it charges and the actions of its rivals.

Unlike other forms of capital, investments in human capital accrue to the employee.

As a result, workers who have high human capital can market their skills among competing firms.

This is a situation when one party knows more than the other. In other words, there is a imbalance of information.

Asymmetric information

Arsenios says he gets 70 utils per slice from eating pepperoni pizza versus 50 utils from eating cheese pizza. Stavros says he gets 60 utils from eating the same pepperoni pizza. What can we conclude? A. Arsenios likes pepperoni pizza more than Stavros does. B. Arsenios prefers pepperoni pizza to cheese pizza. C. Arsenios will always choose pepperoni pizza over cheese pizza.

B, because since Arsenio's assigned pepperoni pizza 20 more utils than cheese pizza, we can conclude that he gets more satisfaction from pepperoni pizza.

example of hot hand fallacy

Basketball fans believe that players have "hot hands," being more likely than average to make the next shot when currently on a hot streak, yet several studies have shown there is no empirical evidence for such streaks predicting their ability to make the next shot.

Why are barriers to entry crucial to the creation of potential long-run monopoly profits?

Because barriers to entry such as one firm having control of most of their resources makes it difficult for new firms to enter. Also in order to be competiting with monopolies such as Apple or Microsoft, you would need billions of dollars to enter.

Unions impact on wages

Because firms cannot do without labor, unions can threaten a strike to negotiate higher wages.

An isolated community has one hospital. The next closest hospital is 2 hours away. Given what you have learned about monopoly, what prices would you expect the hospital to charge? How much care would you expect the hospital to charge? Compare the prices and amount of care provided to those of a comparably sized hospital in a major metropolitan area where competition is prevalent.

Because the demand for medical care is quite inelastic (most hospitals are), an isolated hospital with significant monopoly power will charge more and offer fewer services. In contrast, a comparably sized hospital in a major metropolitan area where competition is usual is forced to charge the market price and offer more services to attract consumers.

Example of Gambler's Fallacy

Believing that if you flipped five heads in a row on a coin that you are "due for" a tail on the next flip.

The following situations illustrate the real-income effect. Place them in order based on how strong the effect is from strongest to weakest. a) Save 40% off the price of a new barbecue grill. b) Save 20% off on a bottle of water. c) Save 5% off the price of a new home. d) Save 50% off the price of a pair of jeans.

C, A, D, B

A new musical group called the Incentives cuts a debut single. The record company, which is a profit-maximizing monopolist, determines a number of possible price points for the group's first single, "The Big Idea." Price Per Download - Quantity of Downloads $2.99 - 25,000 $1.99 - 50,000 $1.49 - 75,000 $0.99 - 100,000 $0.49 - 150,000 The record company can produce the song with fixed costs of $10,000 and no variable cost.

Calculate the total revenue and marginal revenue at each quantity: At a price of P = $1.49 , the firm maximizes profits. Explanation: A profit-maximizing monopolist produces at the point where marginal revenue (MR) = marginal cost (MC). In this particular question, no point exactly reflects MR = MC. However, economic theory can still help us. If MR > MC, the firm should keep producing. As soon as MR < MC, the firm loses money. This switch happens here between the price of $1.49 and the price of $0.99. At $0.99, the firm has negative marginal revenue, which means it has produced too much. The company makes a total profit of $101,750. Explanation: Because marginal costs are $0, the firm would maximize its profits at $1.49. The company would make $111,750 - $10,000, or $101,750. If you were the agent for the Incentives, you would request a signing fee for no more than $100,000 Explanation: The company makes $101,750 from production, so as the agent, you could request any signing fee up to that amount. Since determining a fee is a negotiation and both sides have to gain from trade, as the agent, you should argue for a number close to $100,000, and you should expect the firm to argue for a much smaller fee.

Example of derived demand

Consumer demand for iPads causes Apple to demand the resources needed to make them. The switches, glass, memory, battery, and other parts have little value alone, but when assembled into an iPad, they become a device that many people find very useful.

Name all the barriers that exist within the monopolistic market.

Control of Resources Problems in Raising Capital Economies of Scale

This is a fixed fee that the insured pays when receiving a medical service or filling a prescription.

Copayments

What are some criticisms of in-kind assistance programs for those in poverty?

Correct Answer(s): It is paternalistic and disrespectful In-kind assistance is inefficient. Wrong Answer(s): The assistance can be used for undesirable purposes. Assistance comes in a limited range of forms.

Differences between monopolistically competitive firms and competitive firms.

Correct Answers: *In monopolistically competitive industries, products are more differentiated than in competitive industries. *monopolistically competitive firms use markup to increase profits, while markup is not possible in competitive industries. *Firms in competitive industries must sell at market price, while firms in monopolistically competitive industries can charge more. Incorrect Answers: *There are strict government regulations on monopolistically competitive industries, while competitive industries are regulation-free. *There are usually few competitors in a monopolistically competitive industry, while there can be many competitors in a competitive industry. *The barriers to entry are high in competitive industries and very low in monopolistically competitive industries.

Consider a monopolistically competitive firm. From the point of view of the remaining firms, as firms leave the industry we can think of this as a shift to the a) left for each individual firm's supply curve. b) left in each individual firm's MC curve. c) right in each individual firm's ATC curve. d) right in each individual firm's demand curve.

D

Similar to copayments and premiums, a ___________ are fixed amounts the insured must pay before most of the policy's benefits can be applied.

Deductibles

_____ are sometimes subject to exceptions, such as a necessary visit to the emergency room or preventive physician visits and tests.

Deductibles

Concentration ratios

Economists use concentration ratios as a measure of the oligopoly power present in an industry. The most common measure, known as the four-firm concentration ratio, expresses the sales of the four largest firms in an industry as a percentage of that industry's total sales.

Example of income effect

Eddie feels he earns enough money and decides to cut back on his hours.

Example of Network Externalities

Facebook and MySpace: In the early days, MySpace had many more users than Facebook, but since they were late to social networking, Facebook caught up and MySpace was forgotten.

True or False: Lowering the price of a product is a simple way to increase the product's marginal utility for buyers.

False, because MU is not the same as MU per dollar. Lowering the price will not increase the satisfaction a consumer will get from one unit of the product, so the marginal utility does not change. However, the consumer will be able to afford more of the product, and so the amount of utils per dollar spent will change.

In the short run, low barriers to entry and exit allow new entrants into a monopolistically competitive market.

False, because entry and exit to the market doesn't exist in the short run.

A pizza company that charges five dollars more for its pizzas than a competitor's pizza will find it impossible to survive in a monopolistically competitive market.

False: This company's pizzas may be more expensive because they have a higher quality.

As an individual's deductible decreases, one would expect his or her number of annual doctor's office visits to decrease as well.

False: As the deductible decreases, the individual is responsible for less of the expense and thus would demand a higher quantity of doctor visits.

Store-bought frozen ice cream, soft-serve ice cream, and frozen custard all represent different levels of product quality. T or F

False: In this context, "style" might refer to different flavors like vanilla, chocolate, or strawberry.

Given the inelasticity of demand for health care, policymakers should focus on regulating the price of medical services to change consumption behavior.

False: The most expensive procedures are the ones where demand is especially inelastic. Someone in need of a heart transplant is not in a position to make different consumption choices.

Markup

This is the difference between the price the firm charges and the marginal cost of production.

Large public water and sewer companies often become natural monopolies because they benefit from economies of scale. Although the company faces high start-up costs, the firm experiences falling average per-unit production costs as it expands and adds more customers. Smaller competitors would experience higher average costs and would be less efficient.

For a natural monopoly, the average costs decline over a large output so it is more efficient to have one firm in the market. A new firm would find it difficult to compete with an established firm. A competing firm would also reduce the output for the first firm, thereby increasing average cost.

The cost of this bias is missed opportunities that could potentially enhance welfare.

For example, an individual with status quo bias would maintain a savings account with a low interest rate instead of actively shopping for better rates elsewhere. This person would lose the potential benefits from higher returns on savings.

Budget Constraint example

For example: If you have $10 to spend on pizza ($2 per slice) and Pepsi ($1 per can), you could choose to purchase 10 cans of Pepsi and forgo the pizza. OR you could purchase 5 slices of pizza and do without the Pepsi. OR you could choose a number of different combinations of pizza and Pepsi.

The decision-making effect occurs when people change their answer depending on how the question is asked (or change their decision depending on how alternatives are presented.

Framing Effect

Monopolistically Competitive Firm in the Short Run

Graphically, the total cost is represented by an area that is slightly smaller than the area representing revenue. Graphically, the total revenue is between ATC and Price. Graphically, consumer surplus is the triangular area bounded by the demand curve. Graphically, the area representing profit is much smaller than the area representing revenue.

Which of the following is a consequence of product differentiation in monopolistically competitive industries?

Greater product causes greater inefficiency. Explanation: Consumers tend to have more inelastic demand for highly differentiated products. This causes higher prices for consumers, as firms with differentiated products produce with more excess capacity.

"To economists, human life is not of infinite value." Explain this statement and its economic implications for end-of-life care.

Human life is not of infinite value because we live in a world of trade-offs. An "infinite value" implies that the value is so high that all medical paths are worth pursuing. However, one must be mindful of the marginal cost of care versus the amount of additional life that end-of-life care buys. This consideration is especially important at the end of life when extraordinary medical efforts might mean only a few extra days of low-quality life. The law of diminishing return applies, and the application of this economic principle suggests that resources should be redirected from end-of-life care to preventive care with larger returns.

What does a shift from point 1 to point 3 illustrate about the result of advertising in monopolistically competitive markets?

If all firms in the market advertise, then each one sees its costs go up without an increase in its sales.

What does it mean when the Marginal utility is negative?

If the marginal utility of brownies is negative, then that means the person as gotten sick of eating too many brownies.

When a price changes, the substitution effect and the real-income effect have equal impacts on consumer behavior.

If the price changes by only a small amount, the real-income effect is negligible. If a price changes and a consumer saves 3 cents, for example, that is unlikely to make a significant difference to the consumer's purchasing power. If the consumer's choices are affected, it is due almost entirely to the substitution effect.

Imagine that your roommate's alarm goes off at 4:30 every morning, and she hits snooze every 10 minutes until 6:00, when you both need to get up. She insists that this maddening procedure is the only way she is able to wake up. How would you respond? Is there a nonviolent way you can convince her to change her morning wake-up routine?

If your roommate does not wake up immediately, a tit-for-tat response would be for you to get up. Once up, you should turn on the lights, get dressed, and make enough noise that your roommate cannot easily sleep. If you use this approach, it won't take long for your roommate to realize that she should set the alarm for a more reasonable time and not hit the snooze button. When your roommate no longer relies on the snooze button to wake up, you can return to your normal sleeping pattern and stay in bed for as long as you wish.

What happens to exports, trade deficit, and imports during a time of recession?

Imports tend to generally drop and trade deficits tend to shrink during downturns. Exports also drop during recessions.

How can we use the market demand curve to illustrate the consumer surplus and producer surplus created by a competitive market?

In a competitive market, supply and demand determine the price and quantity.

In a monopolistically competitive market, consumers must choose along several distinct variations of the same basic product type.

In a monopoly market, consumer choice is limited because a particular good is unique.

Here is how the ultimatum game works:

In the game, player 1 is given a sum of money and is asked to propose a way of splitting it with player 2. Player 2 can either accept or reject the proposal. If player 2 accepts, the sum is split according to the proposal. However, if player 2 rejects the proposal, neither player gets anything. The game is only played once, so the first player does not have to worry about reciprocity.

How can we create a graph that illustrates the consumer surplus, producer surplus, and deadweight loss that occur when a monopolist takes over the market?

In this figure, we see that above C, the consumer surplus has shrunk, and if we look at C and below C, the producer surplus has increased. Areas B & D represent the higher price charged by Harbucks (deadweight loss). Allowing a monopolist to capture a market does not benefit consumers and is inefficient for society.

What are reasons for international trade to increase?

Increased specialization among nations. Reduced trade barriers Lower Shipping Costs

Copayment example

Insurance companies use copayments in part to share expenses with the insured.

______________ cover certain medical expenses in exchange for a set monthly fee.

Intermediaries

These type of decisions involves planning to do something over a period of time, which requires valuing the present and the future consistently.

Intertemporal decision-making

How does advertising affect demand?

It makes the demand curve more inelastic by informing consumers about differences they care about.

C.M.---Many sellers---Similar products---Free entry and exit M.C.---Many sellers---Differentiated product---Easy entry and exit Oligopoly---A few sellers-Differentiated product-Barriers to entry Monopoly---1 seller---Unique product---Significant barriers

Just like a firm in a monopolistic competition, oligopolists sell differentiated products (most of the time).

perfect complements indifference curve

L-shaped

Determinants needed to graph a firm's demand curve for labor:

Labor & Value of the marginal product of labor

What are some reasons for healthcare expenses being so high in the United States?

Low Patient copayments and doctors' fear of malpractice lawsuits.

If demand falls, what is likely to happen to a monopolist's price, output, and economic profit?

Lower demand causes the price to fall, the output to decline, and the profit to disappear.

Human capital impact on wages

Many jobs require substantial education, training, and experience. As a result, workers who acquire additional amounts of human capital can command higher wages.

We learned that when caps are placed on how much a physician can be paid for a service under Medicare, doctors charge more for other services. Can you think of anything else a physician might decide to do if they feel that what Medicare pays is insufficient to cover their costs?

Medicare is a government program, but physicians are not required to participate. Therefore, another option is not to participate, which is exactly what some doctors decide to do. These doctors have decided that as long as they're able to keep their appointment books reasonably full with non-Medicare patients, the opportunity cost of taking Medicare patients is too high.

Competitive Markets Monopoly Many Sellers One seller Similar products A unique product w/o close substitutes Free entry and exit Significant barriers to entry and exit

Monopolistic competition Many sellers Differentiated products Low barriers to entry and exit

This is the lack of incentive to guard against risk where one is protected from its consequences.

Moral Hazard

What are the effects for reducing trade barriers?

More competition lessens the influence of monopoly and promotes the efficient use of resources.

Less efficiency and more excess capacity equals more product differentiation.

More efficiency and small amount of excess capacity equals a elastic demand.

example of framing effect

More people became receptive to the use of military force when it was framed in terms of how many lives could be saved instead of keeping losses to a minimum.

Consumer Surplus for a monopolist formula

Price determined by MR=MC minus Price determined by supply and demand equilibrium multiplied by 100.

Which of the following are examples of natural barriers to entry? A) Over time, a firm takes control of 85% of the world's supply of a chemical used in the production of plastic. B) Lenders are hesitant to provide funding for new firms that will compete with a large, well-established firm. C) A local government gives a construction company the exclusive right to build all the town's future buildings. D) Smaller companies with smaller production processes have higher per-unit costs than larger companies. E) BioCorp develops a new skin cancer drug for which they receive a patent.

Natural Barrier to Entry: B) Explanation: Problems raising capital A) Explanation: Resource control D) Explanation: This is a description of economies of scale Not a Natural Barrier to Entry: C) Explanation: Licensing-related barriers are government created, not natural. E) Explanation: Patents are a government-created barrier to entry, not a natural one.

In almost all games of chance such as the lottery, they have _____ _____ ______ for the participants, meaning that players are not likely to succeed at the game.

Negative Expected Values.

The total exports of final goods and services minus total imports of final goods and services.

Net Exports

Is there any way for a monopoly to operate more efficiently than a competitive market? Why or how?

No: the equilibrium point in a competitive market is the point of optimal market efficiency. Explanation: For a monopoly, the equilibrium point is associated with a higher price and lost consumer surplus. There may, however, be other considerations besides market efficiency that are reasons to tolerate a monopoly.

Even though both products' utilities should equal one another, they can not intersect.

Nor can we have the graph be thick. Meaning two points having the same x-value, but different y-value.

One Price vs Price Discrimination

One Price: a firm that charges a single price uses MR = MC to earn a profit. Price Discrimination: When a firm price-discriminates, it takes in more profit than a firm that charges a single price. The discriminating firm increases its revenue by charging some customers more and other customers less. The increase in profit is partly offset by the loss of revenue from existing customers who receive a lower price.

Describe the difference between a monopoly and a natural monopoly?

One difference between a monopoly and a natural monopoly is that a natural monopoly works at lower prices.

Does a monopolist operate a free market: to enter and exit? Market with low barriers? or a market with High barriers to entry and exit?

Option C is correct.

What happens to outsourcing in the long run?

Outsourcing is a key component in international trade.

Competitive outcome

P=MC

Example of outsourcing labor

Page make-up is often done overseas to take advantage of lower labor costs. This outsourcing has been facilitated by the Internet, which eliminates the shipping delays and costs that used to constitute a large part of the business.

Why would it be beneficial to suspend or shorten patent protection by a government?

Patents give firms the incentive to innovate in the short run, but they also limit the amount of supply of a vaccine. Explanation: The trade-off for innovation would be lower supply. The change to patent protection removes a government-created barrier to entry, and other firms would be free to try to sell the same product. This is important to the success of a vaccination program because one company, no matter how large, would not have the resources and production capabilities to meet the full world demand for a vaccine.

This occurs when risk tolerance is not consistent.

Preference reversal

There are three types of people who take risk: Risk-averse, risk-neutral, and risk-takers. Which type of people prefer gambles with lower expected values, and potentially higher winnings, over a sure thing?

Risk-takers

How is Wage Discrimination reduced by competition?

Say you like one worker and not the other. So you pay the one you like more than the other. This is discrimination. So the one you don't like goes to work for your competitor.

Advertisement: Energizer

Slogan: He keeps going and going and going. How it increases demand: The campaign focuses attention on longevity in order to justify the higher prices on top-quality batteries.

Compensating differentials impact on wages

Some workers are eager to have jobs that are more fun, exciting, prestigious, or stimulating than others. As a result, they are willing to accept lower wages. Conversely, jobs that are unpleasant or risky require higher wages.

Total profits for monopolists formula

TP = Q X (P - ATC)

Clayton Act of 1914

Targets corporate behaviors that reduce competition

For each criterion, which country's healthcare system performs better—Canada or the United States?

The Canadian System: Overall per capita cost of the health care Healthcare access to even the poorest because it is paid for by taxes. The U.S. System: Shorter wait times to receive needed health care Availability of all needed drugs.

What has been happening to the United States regarding International Trade as of 2017?

The United States has an overall trade deficit. AND The majority of U.S. goods imports come from fewer than ten nations.

This international organization facilitates trade agreements between nations.

The World Trade Organization (WTO)

comparative advantage

The ability of a country to produce a good it is best at making. So then you can trade the product with other nations for the good they are good at making.

What is the consequence when a tariff of $20 per pair of shoes is levied?

The amount imported drops to QT-QD2. At the same time, the amount supplied by domestic producers rises along the domestic-only supply curve from Qd1 to Qd2

A company is evaluating the value of the marginal product per dollar spent across the three factors of production to make sure it is utilizing its resources efficiently. The firm discovers that it gets $100 in relative benefits from labor, $10 in relative benefits from land, and $70 in relative benefits from capital. Knowing this information, how should the company use its resources?

The company should decrease its use of land. The company should increase its use of labor.

Samaritan's Dilemma

The conflict a person can have between transferring income to the poor and discouraging behavior that increases the incidence of poverty.

patents and copyrights

The copyright is the government's assurance that no one else can play or sell the work without the artist's permission. Similarly, when a pharmaceutical company develops a new drug, the company receives a patent under which it has the exclusive right to market and sells the drug for as long as the patent is in force.

What is the diamond-water paradox?

The diamond-water paradox explains why water is essential to life, is inexpensive, while diamonds, which do not sustain life, are expensive. Many people of Adam Smith's era, in the eighteenth century, found the paradox perplexing. We can solve the diamond-water paradox by recognizing that the price of water is low because its supply is abundant and the price of diamonds is high because their supply is small. If water were as rare as diamonds, there is no doubt that the price of water would exceed the price of diamonds.

Efficiency wages impact on wages

The firm pays above-equilibrium wages to help reduce slacking, decrease turnover, and increase productivity.

single-payer system

The government covers the cost of providing most healthcare, and citizens pay their share through taxes.

Quotas function like tariffs with one crucial exception

The government does not receive any tax revenue.

From least efficient to most efficient: 1)Comcast is the only high-speed Internet provider for a particular urban area. 2)Javier's shoe store sells many types of shoes and operates with a lot of excess capacity. 3) Michael opens a food cart serving a type of food that is only slightly differentiated from his nearby competitors'. 4) Kayla's cranberry bog produces one product and sells it at market price.

The government does not regulate monopolistically competitive industries because if it did, it would eliminate the product differentiation consumers enjoy from those companies. Therefore, the inefficiencies present in monopolistic competition do not warrant government action.

Marginal utility never increases with quantity.

The satisfaction that a consumer derives from consuming a good or service often delines with each additional unit consumed. This is known as diminishing marginal utility. However, in rare cases, marginal utility can rise—but only temporarily.

Human Capital

The set of skills that workers acquire on the job and through education.

The supply of rental units does not depend on the change in demand.

The supply of land is ordinarily fixed. This is illustrated with the perfectly inelastic supply curve.

Solutions for Monopoly

There are three potential solutions to the problems of Monopoly. 1) The government may break up firms that gain too much market power in order to restore a competitive market. 2) The government can promote open markets by reducing trade barriers. 3) The government can regulate a monopolist's ability to charge excessive prices. Also, when the costs of government in regulating a monopoly are greater than the efficiency gains that can be realized, it is better to leave the monopolist alone.

The Long-Run Equilibrium in Monopolistic Competition and Competitive Markets

There are two primary differences between the long-run equilibrium in Monopolistic C. and a Competitive C. market. *First, monopolistic competition produces markup, because P is greater than Marginal Cost. In a competitive market, P=MC. *Second, the output in monopolistic competition is smaller than the efficient scale. In a competitive market, the firm's output is equal to the most efficient scale.

Switching costs

These are the costs incurred when a consumer changes from one supplier to another.

in-kind transfers

These are transfers in the form of goods or services instead of cash.

Underground Economies

These areas are composed of markets in which goods or services are traded illegally.

Efficiency wages

These exist when an employer pays its workers more than the equilibrium wage. *They are wages higher than equilibrium wages, offered to increase worker productivity.

Substitution effect

This effect occurs when consumers substitute a product that has become relatively less expensive as the result of a price change. In other words, the consumer will purchase more of a good that has become relatively cheaper, and vice versa.

real-income effect

This effect occurs when there is a change in purchasing power as a result of a change in the price of a good.

Game Theory

This is a branch of mathematics that economists use to analyze the strategic behavior of decision-makers who have to consider the behavior of others around them. In particular, game theory can help us determine what level of cooperation is most likely to occur.

mutual interdependence

This is a market situation where the actions of one firm have an impact on the price and output of its competitors.

Gini index

This is a mathematical formula of the income distribution of a country's residents. *The ratio of the area between the perfect equality line and the Lorenz curve (A) divided by the total area under the perfect equality line (A+B).

monopoly power

This is a measure of a monopolist's ability to set the price of a good or service.

Util

This is a personal unit of satisfaction used to measure the enjoyment from consumption of a good or service.

Monopsony

This is a situation in which there is only one buyer.

What is Monopolistic Competition?

This is a type of market structure characterized by low barriers to entry, many different firms, and product differentiation.

Oligopoly

This is a type of market structure that exists when a small number of firms sell a product in a market with significant barriers to entry.

Control of Resources

This is essential to producing a good, a firm limit its competition.

income mobility

This is the ability of workers to move up or down the economic ladder over time. *If today's poor must remain poor 10 years from now, income inequality remains high. *However, if someone in the lowest income category can expect to experience enough economic success to move to a higher income quintile, being poor is a temporary condition. *In other words, economic mobility reduces inequality over long periods of time.

Marginal utility

This is the additional satisfaction derived from consuming one more unit of a good or service.

Marginal Product of Labor

This is the change in output associated with adding one additional worker.

Derived Demand

This is the demand for resources needed to produce a finished good or service in another market.

If a nation exports more than it imports, it has a positive trade balance, also known as a: 1) Trade deficit 2) Trade surplus 3) Trade shortage 4) Trade balance

Trade surplus

True or False: Oligopolists have more market power than a firm operating under monopolistic competition.

True

True or False: Developing countries stand to gain from international trade because trade enables them to specialize in producing where they have a comparative advantage.

True because once trade is built on the concept of specialization and the application of comparative advantage in that process.

True or False: Developing countries stand to gain from international trade because trade subjects their local producers to greater competition.

True because trade effectively increases the number of potential competitors in the market, local producers are subject to more competition than would exist without trade.

True or False: Developing countries stand to gain from international trade because trade allows them to produce larger amounts than they could consume themselves, allowing them to take advantage of increasing returns to scale.

True because when countries export goods, they benefit from being able to access a larger marketplace, which gives them the opportunity to produce at a larger scale than they would without trade.

True or False: The Marginal Rate of substitution on a indifference curve can be constant

True, though it varies along the indifference curve.

It is possible for a new entrant to an oligopoly market to be successful, even if existing firms in the market are large and have strong customer bases.

True. Because Facebook was able to join the social media industry and take customers away from more powerful rivals like MySpace and Friendster. Firms that innovate and continue to offer better products or services can break into markets even with significant network externalities.

Advertising is not equally productive for firms in every market type.

True: Firms in monopolistically competitive markets investing advertising more than firms in other markets. Since these firms have differentiated products, they have the most to gain through advertising.

The Impact of a Quota

When a quota is imposed, the price rises and domestic production expands from QD1 to QD2. At the same time, imports fall to QQ(Quantity Quota) - QD2(2nd Quantity Demand). Quotas create deadweight loss, a gain for foreign suppliers, and an increased producer surplus for domestic firms.

How are monopolies created?

When a single company buys out all competitors to create a single large company for a single product.

The Impact of a tariff

When a tariff is imposed, the price rises and domestic production expands from QD1 to QD2. At the same time, imports fall to QT (Quantity tariff) - QD2. Tariffs also create a deadweight loss, revenue for the government, and increased producer surplus for domestic firms.

Newer automobiles have many safety features to prevent accidents, including antilock brakes, side airbags, traction control, and rear backup sensors. Do these safety features lead the drivers of newer vehicles to drive more safely?

When drivers feel safer, they drive faster. The higher speed offsets the safety gain from safety features that help prevent accidents or make them survivable. Drivers of vehicles who feel especially safe are more likely to take on hazardous conditions and become involved in accidents. In other words, they alter their behavior when driving a safer car. The change in behavior is evidence of a moral hazard problem.

output effect

When the firm or firms sell(s) an additional unit, it generates additional revenues for the firm.

Location and lifestyle impact on wages

When the location is desirable, the compensating wage will be lower. Similarly, when employment is for a highly valued cause, wage is less important. In both situations, the compensating wage will be lower.

When a firm outsources a part of its production process, it may receive immediate benefits from lower labor or other input cost, but the rest of the domestic economy suffers in the long run as workers are displaced.

While transitional impacts may be significant to domestic workers, resources will ultimately be redeployed more efficiently in the long run, which widely benefits producers, consumers, and workers. Outsourcing is a key component in international trade, and trade creates value. The outsourcing of jobs enhances overall social welfare.

Adverse selection happens before the exchange.

While, Moral Hazard can happen after the exchange.

example of priming effect

You are asked two different questions. "How happy are you?" and "How many dates have you had in the last year?" Asking these questions in a different order will have a different outcome.

Perfect substitutes exist when

a consumer is completely indifferent between two goods. Just like how Aquafina and Evian bottled water taste the same.

Perfect complements exist when

a consumer is interested in consuming two goods in fixed proportions. Shoes are a good example. We buy shoes in pairs because the left or right shoe is not valuable by itself. Or like a freezer container and a matching lid.

What is an economic downturn?

a general slowdown in economic activity over a sustained period of time. The main features of an economic downturn include rising unemployment, falling share and house prices, low consumer confidence and declining investment.

Lower prices equals

a larger output effect for the individual firm and only a small price effect in the market.

tit for tat

a long-run strategy that promotes cooperation among participants by mimicking the opponent's most recent decision with repayment in kind

Prisoner's Dilemma

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.

If price is higher than the ATC then it produces __________. If ATC is higher than the price then it produces __________.

a profit; at a loss.

Inequality ratios can be a telltale sign towards

a serious poverty problem.

Nash Equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen.

dominant strategy

a strategy that is the best for a firm, no matter what strategies other firms use

rent seeking

activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes

If a nation imports more than it exports, it has a trade ____________________.

deficit

What Causes Income Inequality?

education, wealth, discrimination, ability, poverty, structural changes in the economy, decline in unions, and family structure changes

Union

is a group of workers who bargain collectively for better wages and benefits. *They are able to secure increased wages by creating significant market power over the supply of labor available to the firm.

Medicaid

is a joint federal and state program that helps low-income individuals and households pay for the costs associated with long-term medical care.

Utility

is a measure of the level of satisfaction that a consumer enjoys from the consumption of goods and services.

Strike

is a work stoppage designed to aid a union's bargaining position. *In effect, unions can raise wages because they represent labor, and labor is a key input in the production process. *Because firms cannot do without labor, an effective union can use the threat of a strike to negotiate higher wages for its workers.

Productivity

is the effectiveness of effort as measured in terms of the rate of output per unit of input.

Marginal Rate of Substitution (MRS)

is the rate at which the consumer is willing to trade off one product for another, while keeping the consumer's utility constant.

If the income effect outweighs the substitution effect,

it will cause the supply curve to bend backward.

What are the factors of production?

land, labor, capital

truth-in-advertising laws

laws designed by the FTC to protect consumers against false advertising

Specific Tariff

levied as a fixed charge for each unit of a good imported

Import quotas are:

limits on the number of products that can be imported into a country.

Trade leads to

lower costs of production and maximizes the combined output of all nations involved.

problems in raising capital

once a monopoly is well established, banks are unlikely to take the risk and lend money to an upstart company looking to compete. For example, if you wanted to compete with Apple and Android, you would need tens of millions of dollars.

Significant __________ may cause less established firms to go out of business or force them to ___ with other companies.

positive network externalities; merge

Covering certain utility in exchange for a fixed monthly fee is known as

premium

The real-income effect of a price change is most significant when

prices change enough to cause a measurable effect on the purchasing power of the consumer's income or budget.

Income is generated through the _______ of goods and services. In the United States, ____-______ of all income takes ___-_____ goes to those who own the other factors of production, namely land and capital.

production, two-thirds, one-third, land

life-cycle wage pattern

refers to the predictable effect that age has on earnings over the course of a person's working life. Wages peak for people in their early 60s and then slowly fall thereafter.

The Output effect

reflects how the lower prices affect the number of customers. Also, the output effect is usually greater than the price effect.

Indifference curve

shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility (the consumer finds all combinations on a curve equally preferred).

If trade is unrestricted, imports are free to enter the domestic market

so that supply increases to S(free trade).

Economic Rent

that 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

labor-leisure trade-off

the supply of labor depends both on the wage that is offered and on how individuals want to use their time

In order to plot a firm's demand curve for labor you need,

the value of the marginal product of labor (Price x Marginal Product of labor), and the number of workers.

perfect substitutes

two goods with straight-line indifference curves

This output effect occurs

when a change in price affects the number of customers in a market.

Price leadership occurs

when a single firm, known as the price leader, produces a large share of the total output in the industry. The price leader sets the price and output level that maximizes its own profits. Smaller firms then set their prices to match the price leader.

Network externality occurs

when the number of customers who purchase or use a good, influences the demand.

One argument for trade barriers is that domestic industries sometimes need trade protection ------- develop the capacity to compete internationally. Unfortunately, however, for ------- reasons, trade barriers are harder to ------- than they are to -------.

while they political remove establish

Because trade is unrestricted, domestic producers who might wish to charge a price higher than that charged by foreign producers

would find that they could not sell their shoes at that price. As a result, the domestic price decreases to the world price, which is $100.