Exam 2.1

Question 1

difference between long run and short run

Answer 1

long - time period after entry and exit has occurred

short - time period before entry and exit can occur

(demand curves are more elastic in the long run)

Question 2

define sunk cost

Answer 2

A sunk cost refers to money that has already been spent and which cannot be recovered

Question 3

define fixed costs

Answer 3

costs that do not vary with the quantity produced

Question 4

difference between sunk and fixed costs

Answer 4

sunk costs are NEVER relevant because they cannot be changed by any choice

Question 5

difference between explicit and implicit costs

Answer 5

explicit - a cost that requires a money outlay

implicit - a cost that doesn’t

(implicit is figurative, explicit is literal)

Question 6

difference between accounting profits and economic profits

Answer 6

accounting - total revenue minus explicit costs

economic - total revenue minus total costs including implicit opportunity costs

firms want to maximise economic profit, not accounting profit

Question 7

define variable costs

Answer 7

costs that vary with output

Question 8

define increasing cost industry

Answer 8

an industry in which the costs of production increase with greater output
shown with an upward-sloped supply curve

Question 9

define constant cost industry

Answer 9

an industry in which the costs of production do not change with greater output
shown with an flat supply curve

Question 10

define decreasing cost industry

Answer 10

an industry in which the costs of production decrease with greater output
shown with an downward sloping supply curve

Question 11

define elimination principle

Answer 11

the theory that states that above-normal profits are eliminated by entry and below-normal profits are eliminated by exit

Question 12

define market power

Answer 12

the power to raise prices above marginal cost without fear that other firms will enter the market

firms that have market power are called a monopoly

Question 13

what is MR = MC

Answer 13

MR: Marginal Revenue is the change in total revenue from selling an additional unit

MC: Marginal Cost is the change in total cost from producing an additional unit.

To maximise profit, a firm increases output until MR = MC

Question 14

define economies of scale

Answer 14

the advantages of large-scale production that reduces average cost as quantity increases

Question 15

define natural monopoly

Answer 15

when a single firm can supply the entire market at lower cost than two or more firms

Question 16

define barriers to entry

Answer 16

factors that increase the cost to new firms of entering an industry

Question 17

define antitrust laws

Answer 17

laws that give the federal government legal authority to prosecute monopolies or attempts to monopolise

Question 18

define price discrimination

Answer 18

the selling of the same product at different prices to different customers

Question 19

define arbitrage

Answer 19

the practise of taking advantage of price differences for the same good in different markets by buying low in one market and selling high in another

Question 20

define perfect price discrimination

Answer 20

when each customer is charged their maximum willingness to pay

Question 21

define tying

Answer 21

a form of price discrimination in which one good, called the base good, is tied to a second good called the variable good

e.g. printer and ink

Question 22

Define bundling

Answer 22

the requirement that products be bought together in a bundle or package

e.g. toyota sells cars, not engines, wheels etc

Question 23

define cartel

Answer 23

a group of suppliers that tries to act as if they were a monopoly

Question 24

define oligopoly

Answer 24

a market dominated by a small number of firms

Question 25

define dominant strategy

Answer 25

a strategy that has a higher payoff than ay other strategy no matter what

Question 26

what is the prisoner's dilemma

Answer 26

situations in which the pursuit of individual interest leads to a group outcome that is in the interest of no one

Question 27

define tacit collusion

Answer 27

when firms limit competition with one another but they do so without explicit agreement or communication

Question 28

define network good

Answer 28

a good whose value to one consumer increases the more that other consumers use the good

Question 29

define nash equilibrium

Answer 29

a situation in which no player has an incentive to change strategy unilaterally

Question 30

define coordination game

Answer 30

game in which the players are better off if they choose the same strategies than if they choose different strategies when there is more than one strategy on which to potentially coordinate

Question 31

define constestable

Answer 31

market condition in which a competitor could credibly enter and take away business from the incumbent

Question 32

define monopolistic competition

Answer 32

a market with a large number of firms selling similar but not identical products

Question 33

define human capital

Answer 33

the productive knowledge and skills that workers acquire through education, training and experience

Question 34

define compensating differential

Answer 34

a difference in wages that offsets differences in working conditions for otherwise similar jobs

Question 35

define statistical discrimination

Answer 35

discrimination using information about group averages to make conclusions about individuals

Question 36

define free ride

Answer 36

someone who consumes the benefits of a public good without paying a share of the costs

Question 37

define forced riders

Answer 37

someone who pays a share of the costs of a public good but who doesn't enjoy the benefits

Question 38

what is tragedy of the commons

Answer 38

the tendency of any resource that is unowned, and hence nonexcludable, to be overused and undermaintained

Question 39

define public choice

Answer 39

the study of political behaviour using the tools of economics

Question 40

define rationally ignorant

Answer 40

when the benefits of being informed are less than the costs of becoming informed, a person may be rationally ignorant

Question 41

define median voter theorem

Answer 41

the principle that when voters vote for the policy that is closest to their ideal point on a line, then the ideal point of the median voter will beat out any other policy in a majority rule election