Chapters 11, 16, 32, 33

Question 1

Imperfect competition

Answer 1

Between perfect competition and Monopolie

Question 2

Theory of monopolistic competition

Answer 2

explains why there are many small firms but each with a degree of market power

Question 3

Oligopoly

Answer 3

An industry with a small number of large firms that each with a degree of market power who actively compete with each other

Question 4

Concentration ratio

Answer 4

the fraction of total market sales controlled by a specific number of the industry’s largest firms

Question 5

Differentiated product

Answer 5

a group of products that are similar enough to be called the same product but dissimilar enough to be sold at different prices

Question 6

Assumptions of monopolistic competition

Answer 6

firms have the same cost curves
firms sell a differentiated product
many firms in the industry
freedom of entry and exit

Question 7

Assumptions of monopolistic competition

Answer 7

firms have the same cost curves
firms sell a differentiated product
many firms in the industry
freedom of entry and exit

Question 8

what quantity do firms in monopolistic competition produce?

Answer 8

A quantity less that the minimum efficient point on the LRAC curve
(where MC = MR)

Question 9

Oligopoly

Answer 9

an industry that has two or more firms where at least one produces a significant amount of the industry’s total output

Question 10

Strategic behavior

Answer 10

Oligopolies make decisions that are based on the reactions of their rivals to their actions

Question 11

Game theory

Answer 11

Based on the idea that oligopolies’ can either compete to maximise their own profits or cooperate to maximise joint profits

Question 12

Nash equilibrium

Answer 12

when each player is doing the best that it can given the behavior of the opponent

Question 13

Collusion

Answer 13

when firms agree to restrict output to raise prices
Overt: firms openly agree to do this
Covert: firms agree in secret
tacit: happens without any agreement

Question 14

Why do consumers gain from Oligopoly competition?

Answer 14

The firms attempts to outdo one another results in better pricing, advertising, and innovation which usually benefits the consumer

Question 15

Basic functions of government

Answer 15

Enforce property rights

- definitions of rights and obligations of institutions

Question 16

The defense for free markets

Answer 16

formal defense: in free markets price would equal marginal cost and the economy would be allocatively efficient

Question 17

Informal defense three main arguments

Answer 17

automatic coordination
pursuit of profits drives innovation
free markets permit a decentralization of market power

Question 18

Why are market failures inevitable?

Answer 18

economies of scale - results in only a few firms being able to produce at low cost
firms sell differentiated products and therefore have some market power
firms can gain a temporary monopoly through innovation

Question 19

Externalities

Answer 19

3rd party effects

Question 20

Negative externality

Answer 20

a negative effect to a 3rd party (such as society) from production

Question 21

The four types of goods

Answer 21

Private
Public
Common property resource
Club goods

Question 22

rivalrous goods

Answer 22

goods that can only be possessed or consumed by a single user

Question 23

excludable goods

Answer 23

goods that a consumer can be prevented from using

Question 24

Asymmetric information

Answer 24

one party of a transaction can take advantage of special information

Question 25

For what broader social goals might a government want to intervene in the market?

Answer 25

income distribution - examples; child benefits, tax and transfer, employment insurance Protecting others from harming others

Question 26

The reasons for market failure and rationale for government intervention

Answer 26

Firms with market power Externalities Common property resources and Public goods Asymmetric information

Question 27

Open economy

Answer 27

engages in international trade

Question 28

A closed economy

Answer 28

has no foreign trade

Question 29

What are the gains from trade?

Answer 29

increased output form the specialization that comes with international trade

Question 30

Absolute advantage

Answer 30

the difference of absolute cost of producing between counties

Question 31

Comparative advantage

Answer 31

difference in opportunity cost of producing between different countries

Question 32

What are the gains from specialization

Answer 32

when two countries differ, they can specialize in the products that it is best at making (comparative and absolute advantage) which increases efficiency and trade with product items that other countries can better produce world output increases if countries specialize in producing the goods they have comparative advantage

Question 33

Trade benefits for small countries

Answer 33

international trade allows for small countries to reap the benefits by trading with the goods that it has a production advantage in

Question 34

Learning by doing

Answer 34

specialization increases efficiency of labour as workers get better at the tasks they do more often - shifts the LRAC curve downward

Question 35

The law of one price

Answer 35

when a product is traded throughout the entire world, the price differs only by the difference in price of the transportation of that product

Question 36

Terms of trade

Answer 36

the ratio between costs of imports and price of exports

Question 37

What is a Tariff?

Answer 37

A tax imposed on imported goods or services | - ( a method of restricting imports)

Question 38

The case for protection

Answer 38

promoting diversification of production protecting specific groups Improving terms of trade

Question 39

Effects of a tariff

Answer 39

Imposes costs on consumers Benefits domestic producers Generates income for the government - the net effect however generates a deadweight loss in the economy

Question 40

Dumping

Answer 40

when an exporter exports to another country at a price below the domestic price in that country

Question 41

Countervailing duties

Answer 41

A countervailing duty is a tariff imposed by one country to offset the effects of specific subsidies provided by foreign governments

Question 42

Trade diversion

Answer 42

concentrating trade within a specific group by reducing trade barriers within that group

Question 43

Trade creation

Answer 43

reducing trade barriers within a group of countries to increase general trade without affecting the amount traded with countries outside the group