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Perspective GM1402 > EXAM Practice > Flashcards

EXAM Practice Flashcards

1
Q

Economies of Scale?

A

Increase the quantity and lower the price (Competitive strategy/Entry barrier)

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1
Q

Economies of Scope?

A

A decrease in the average cost of production, often when you acquire more than one entity.

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2
Q

If an unregulated firm were free to maximize profits, what q output and price would they charge?

A

They would charge the highest possible price for the lowest amount of q-outputs.

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3
Q

First move advantage for a natural monopolist?

A

It’s pretty much impossible for other firms to join the market (entry barriers that’s impossible to beat e.g., Large economies of scale.

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4
Q

If a regulator would regulate the natural monopolist to charge P=MC (social optimal price), what would happen? ( & ett begrepp)

A

The market would cease to exist because investor would not invest in these kind of market. This is also called “Allocative Efficiency”.

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5
Q

Ramsey Pricing?

A

When the regulators set P = LRAC for the monopolist. Price is a compromise price. Not as low as social optimal but not as high as profit maximisation (as the monopolist set before the regulation). Investor does still want to invest in the market.

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6
Q

R = TR - TC / K ? (Public utility)

A

(K is the firms invested capital or rate base) Permitted Rate of Return - if R is to low investor will stay away. If R is to high output will be restricted below social optimal and high profits will occur (not good either).

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7
Q

Regulatory lag?

A

When costs increase or decrease and this in-turn could impact the utility. If costs goes down, the utiility will earn a value above the rate of return. Vice vers if costs increases. (Also explained as a chock in increase or decrease in costs).

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8
Q

The Averch-Johnson Effect?

A

The utility’s cost of capital = S(cost of capital) - (r-s) = 2s - R (The regulated utility will invest maximally in capital and still not obtain an
optimal allocation of resources.)

“Averch–Johnson-effekten är reglerade företags tendens att ägna sig åt alltför stora mängder kapitalackumulering för att öka volymen av sina vinster. Om företagens vinst/kapitalrelation regleras till en viss procent så finns det ett starkt incitament för företag att överinvestera för att öka vinsten totalt sett.”

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9
Q

First degree of price-discrimination ?

A

Perfect discrimination. The consumer pays the highest price he/she is willing to pay.

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10
Q

Second-degree price discrimination ?

A

Consumers are offered the same price schedule and then consumers self-select into different price categories. (Example Airplane tickets, different prices depending on when you buy or standards(luxury or not)). Pizza Hut example as well: “if you buy a large pizza for 10 dollars you get one medium for 5 dollar (original price of 7).

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11
Q

Third degree of price discrimination?

A

The company puts the consumers into different price groups. Cinema example: If you’re a senior you just pay 1 dollar but if you are a adult you pay 4. You don’t have the opportunity to choose as you would in second-degree of price discrimination.

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12
Q

Natural monopolist?

A

Decreasing cost industries are natural monopolies.

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13
Q

Capture theory?

A

Regulators are influenced by companies (lobbying).

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14
Q

Movement from regulation to deregulation?

A

New technologies was an underlying reason to deregulation. Supporters of deregulation argues that it will increase efficiency and lower prices.

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15
Q

In the railroads industry (after deregulation)?

A

They eliminated unprofitable routes (higher economic performance) and increased the rates in markets for railroads: Example higher market share in the transportation market) Interindustry competition increased (Trucking industry vs. Railroad industry).

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16
Q

What does deregulation (often) help with?

A

Easier for companies to enter the market, often lower AC and lower consumer prices as well.

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17
Q

The theory of creative destruction?

A
  • Capitalism evolves by destroying companies/industries that uses old technologies when new one as been discovered.
  • According to Joseph Shumpeter capitalism cannot survive.

Not static efficiency (P=MC) - rather dynamic. Thus the market will not earn any profit when P=MC which will lead to no investment in R&D etc. No development.

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18
Q

Incentives to invest in R&D per market structure?

A

Monopol = Low
Oligopol = High
Perfect Competition = Moderate

PV(R&D) < PV(benefits)!!

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19
Q

Patent System pros ?

A

*Patents increase the incentives to invest in R&D by granting contestable monopoly power.
*Patents may result in the optimal level of investment in R&D.
*Patent protection may be necessary for innovation to occur, but there should be a trade-off between the innovation’s time of development and patent life.

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20
Q

Patent Systems cons?

A

*It is found that patents are not effective in appropriating returns from investments in
innovation.
*Nevertheless, patents can nowadays be used to secure credit (patent pledge-ability).

  • Patent-racing?
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21
Q

Monopol Cournot-Nash Equilibrium Quantities?

A

(a-c)/2b = q*

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22
Q

Monopol Cournot-Nash Equilibrium Price?

A

a+c/2 = P*

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23
Q

Monopol Cournot-Nash Equilibrium Profit?

A

(a-c)^2 / 4b

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24
Q

Cournot-Nash Quantites - N firms with Asymmetric information?

(Ci = MC för det företaget du ska räkna ut kvantiteten för)

A

a-C(i) + N (Cmedel av alla företag - Ci)
/
(N+1)b = q

  • OBS! Du räknar nu ut för ett företag endast!!
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25
Q

Cournot Nash quantities - N firms with Symmetric information?

A

Q*= Nq =
(a-c)/b * n / (n+1)

  • OBS!! Du har nu räknat ut marknadens optimala kvantitet. Dela på antal företag igen för att få för varje företag.
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26
Q

Grim Trigger Strategy (trigger price strategy)

A

A single deviation from cooperation ends cooperation forever.

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27
Q

Deviate?

A

Break the corporation, “cheat”.

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28
Q

Entry barriers?

A
  • Limit pricing = Charging a low price today in an attempt to deter entry.
  • Predator pricing = Predatory pricing assumes that a monopolist maximizes profit until entry occurs, and
    after entry, the monopolist expands output aggressively and cuts price, so that the
    entrant sustains an economic loss, even if this requires the monopolist to sustain an
    economic loss as well.
  • Advertising
  • SEE MORE IN THE PIC.
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29
Q

Bertrand Price Equlibrium Formula (differentiated
products)

A

P = a / 2b - c

P1 = P2 = P(market)

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30
Q

Bertrand Profit Equilibrium Formula (differentiated
products) - One firm.

A

(ba)^2 / (2b-c)^2

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31
Q

Tit for tat strategy

A

Collude in the first period and then play the same strategy
as the other player in the subsequent periods. (start by cooperating, and then cooperate if the other did last period,
but defect if the other defected last period.)

32
Q

Trigger Strategy

A

A player using a trigger strategy initially cooperates but punishes the opponent if a certain level of defection (i.e., the trigger) is observed.

33
Q

Mixed Strategy

A

Probability based!

34
Q

Social theory ?

A

“Social theory refers to ideas, arguments, hypotheses, thought-
experiments, and explanatory speculations about how and why
human societies—or elements or structures of such societies—
come to be formed, change, and develop over time or
disappear. “

35
Q

Institutional theory?

A
  • Captures the idea that organizations are influenced by their institutional context, i.e. widespread social understandings, rules, norms, and ideologies that are prevalent in wider society.
  • Organizations are expected to behave rationally by abiding to prescriptions of appropriate conduct to gain legitimacy.
36
Q

Isomorphism is?

A

Isomorphism is the process towards homogeneity.

37
Q

Institution (the concept meaning)?

A

Something (idea, practice, structure, rule) taken for granted.

38
Q

Institutional logic:

A

-Beliefs and rules that structure our cognition and guide our decision-making in an organizational field.

  • Steps away for institutional theory (isomorphism) and involve beliefs as culture and so on.

Structure and Agency is two concepts for business logic.

  • A field, and an organization, might contain multiple, competing ideas
    – Which opens up for agency
39
Q

Conceptualising management accounting change: an
institutional framework (Change framework) ?

A
  • A framework for understand why management accounting
    changes, or not, in organizations.

– Focuses on processes that happen inside organizations instead of looking at the isomorphic pressures in the surrounding field.

– Institutions as taken for granted ways of doing or thinking

40
Q

Change framework - what does it contain?

A

Based on Rules & routines.

Contains:
1. Encoding
2. Enacting
3. Reproduction
4. Institutionalisation (make something normal)

41
Q

What is Rules & Routines? (change framework)

A

Rules: The formally recognized way in which things should be done.

Routines: An established way in which things are actually done.

When rules and routines strongly overlap, the organization is in a
stable mode

Decoupling (in a change perspective) – separating rules and routines.

42
Q

Evolutionary and Revolutionary? (Change framework)

A

Revolutionary change breaks with current institutions, a major change in accounting system may still be evolutionary, if it does challenge our institutions drastically short term. (Evolutionary - det växer fram, skapas).

43
Q

Formal / Informal (change framework)

A

– Formal changes based on organizational power

– Informal change comes from enactment and reproduction over time

44
Q

Regressive / Progressive (change framework)

A

Regressive changes works to enforce current power structures,
hindering development, while progressive points out routes of
development that makes new people come in power

45
Q

The Structure-Conduct-Performance (SCP) Approach?

A

Hypothesizes a direct (cause-effect) relationship between
market structure, market conduct and market performance.

46
Q

The Chicago School Approach?

A

Relies heavily on price theory models to make predictions
about expected conduct and performance. (E.g., Cost-based, demand-based, or competition-based pricing)

47
Q

New Industrial Organization?

A

Uses game theory to model the behaviour of firms within
duopoly and oligopoly markets.

48
Q

Williamson’s managerial utility model?

A

Management seeks to maximize own utility rather than the owners.

49
Q

Mergers?

A

Horizontal or Vertical.

Horizontal = Merge with competitors

Vertical = Buy your own supply-chain (merge)

50
Q

Vertical integration?

A

The firm owns or controls at least two vertically
linked processes in the value chain.

51
Q

Fill in the blancs.

A

A) Underlying Economic transactions and conditions
- Faithful represented and relevant.

B) Financial Reports

C) Capital markets

D) Regulation, other institutional factors and, enforcements.

E) Incentives, Audits, monitoring mechanisms.
Incentives = managerial incentives, capital market incentives and stakeholder incentives.

52
Q

Information uncertainty?

A

Preperers should know more than the users in financial reporting. Thus, information asymmetry could occur.

53
Q

Financial Accounting Theory

A

“What we have done until now”.

54
Q

Positivism?

A

Positivists are empiricists.

55
Q

Normative and prescriptive research ?

A

“To prescribe, using logic reasoning, how and/or why something should be accounted for in a certain way”

56
Q

Descriptive or positive research?

A

“How something is accounted for and/or why something is accounted for in a certain way”

57
Q

Positive accounting theory? (PAT)

A

Wants to enhance the scientific approach for accounting (descriptive). “What is” are more important than “what ought to be”. Accounting theory must remain value-free in order to be scientific. PAT believes that everyone is utility maximisers.

58
Q

Solution for asymmetric information?

A

A strategy known as signaling (Michael Spence- nobel prize same year as Lemon Theory): Signaling theory is useful for describing behavior when two parties (individuals or organizations) have access to different information. Typically, one party, the sender, must choose whether and how to communicate (or signal) that information, and the other party, the receiver, must choose how to interpret the signal.

59
Q

Momentum Trading (weak efficiency)

A

Based on predictable price movements. E.g. If a share price has been going up(down) for a while, it will continue doing so.

60
Q

Post-Earning announcement drift (PEAD)

A

Good news for a stock = Share price goes up.
Bad news for a stock = Share price goes down.

This phenomenon could be on-going for months.

61
Q

Weak form of efficiency ?

A

“You cannot study past or current stock prices in order to predict future prices, since price changes are independent.”

62
Q

Semi-strong efficiency?

A

Current and past events can give signal about the future. Good investors could use this for their advantage and get abnormal returns.

63
Q

Strong form of efficieny?

A

If markets are characterised by strong efficiency, all information is reflected in stock prices. You cannot win over the market due to every piece of information are already calculated into the share price (no abnormal returns).

64
Q

Micro-perspective?

A

Individual firms and investors (users of financial report)

65
Q

Macro-perspective?

A

Countries e.g., Wants higher economic growth, higher GDP & so on

66
Q

Product proliferation?

A

Product proliferation occurs when organizations market many variations of the same products. This can be done through different colour combinations, product sizes and different product uses. This produces diversity for the firm as it is able to capture its sizable portion of the market.

67
Q

Monopoly vs. Perfect Competition?

A

Perfect Cometition = Long-run profits = 0
Monopoly = High profit, low social welfare.
Inovations will be more attractive in a monopoly market but there will be low incentives in the perfect competition market because everyone will copy it.

68
Q

Double Marginalisation ?

A

Double marginalization is a vertical externality that occurs when two firms with market power (i.e., not in a situation of perfect competition), at different vertical levels in the same supply chain, apply a mark-up to their prices.

69
Q

Stackelberg (Different costs)

A

Leader: a-2c’leader+c(follower) / 2b = q*

Follower: a-3c’follower + 2c(leader) / 4b = q*

70
Q

Limit Pricing (if a monopolist wants to deter enter for a new competitor) ?

A

Set P = the potential entrants MC. E.g., MC = 40–>

40 = 780-2Q —> This will result in the output needed for deter enter - Multiply the output with the difference in both MC (MC-Entrant minus MC-Monopolist) to see what the cost is for the monopolist for deter enter.

71
Q

According to the theory of creative destruction, the emphasis on the efficiency of competition and prices
equal to marginal costs is not necessarily in the best interest of society. Explain why?

A

The theory of creative destruction is instead of static efficiency concerned with dynamic efficiency, i.e.
the optimal rate of technological development. The so-called static efficiency involves P = MC, which is
true for perfect competition. But this market structure would not allow for firms to make any profits, hence
they would not have any resources to invest in R&D and technological development would not happen.
Instead, according to Schumpeter and the theory of creative destruction, the best market structure would be
monopolised markets which has a lot of resources that can be invested into R&D.

72
Q

Optimal time for technological development?

A

Marginal benefits = Marginal Cost of development (R&D)

73
Q

X-inefficiency?

A

If r is fixed, then it’s low incentives for minimise costs = creates X-inefficiency. The companies will instead ask for a price increase of their own products instead of focusing on lowering their costs.

74
Q

Social optimal price? (In the chapter involving efficiency)

A

MC = P

75
Q

Peek and load pricing?

A

Charge a higher price during peak hours (electricity example).

76
Q

The Bill ? 5 Elements.

A

Introduced by Obama. A way of avoiding another financial crisis!

5 elements:

Consumer Protection = Give a more straightforward information about mortgages and thus lower adverse selection and information asymmetry.

Derivates (financial) = Financial instruments that depend on previously issued securities

Volcker Rule = Limits what trading banks could to with their money.

Resolution authority = Have the ability to seize failing banks and liquidate them at no cost for the taxpayers.

Systemic Risk Regulation = Monitor markets for bubbles and regulate some systemic financial firms more.

77
Q

Bounded Rationality

A
  • Bounded rationality means that we cannot write a contract ahead of time that will cover every possible situation, since we cannot predict the future = Contracts are incomplete.
  • Transaction costs.

-The bounded rationality opens up for opportunistic behaviour inside the firm by manager’s, who can exploit the bounded rationality and thus use it to maximize his/her own utility, rather than the firm’s utility. In order to mitigate such actions, there is a demand for monitoring, to align the interest of the manager with the interest of the owners. This can for example be done with compensation contracts, to tie the performance of the firm with the manager’s bonuses. The result of bounded rationality is often profit satisfaction instead of
profit maximization.

Perspective GM1402 (1 decks)

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