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Flashcards in Micro Deck (80):
1

Opportunity cost

The value of the best alternative foregone

2

How do you calculate the effective incidence of taxation?

Calculate the % of the deadweight loss borne by each party

3

Why is any point other than the equilibrium not pareto-optimal?

Mutually beneficial transactions are always available

4

In competitive equilibrium, who do resources go to?

Those who value them the most and have the highest willingness to pay

5

What is the slope of the PPF called?

Marginal rate of transformation

6

What does the marginal rate of transformation of a PPF reflect?

Opportunity cost

7

How can you have positive input with zero output?

If a firm has pre-agreed to a certain level of inputs, with sunk costs, but not output

8

What is the law of diminishing returns?

As equal amounts of a variable input are added while all other inputs are held fixed, the resulting increases to output will eventually diminish

9

What does isoquant show?

All the combinations of inputs that produce a given level of output

10

What is the slope of an isoquant called?

The marginal rate of technical substitution

11

What does the slope of an isoquant, the marginal rate of technical substitution, measure?

The rate at which one input can be substituted for the other without changing output

12

What are perfect complements?

2 good where trade-offs are impossible because any deviant from a point X requires an infinite amount of the other to compensate

13

What is the marginal rate of technical substitution equal to?

Marginal product of labour / Marginal product of capital

14

What are increasing returns to scale?

The property of a production process whereby a proportional increase in every input yields a more than proportional increase in output

15

Why is returns to scale a long-run concept?

All inputs must be variable

16

Total costs =

Fixed costs + variable costs

17

Where does the MC curve intersect the AC curve?

At the lowest point of the AC curve

18

Costs =

(wage * labour) + (unit cost of capital * capital)

19

What does an isocost line show?

The maximum amount of K and L the firm could afford for a given cost level

20

What is the slope of the isocost line?

the negative of the input price ratio (-w/r)

21

A profit maximising firm should select inputs such that MRTS =

-w/r

22

What is minimum efficient scale?

the level of production required for long-run average costs to reach their minimum

23

When should a firm shut down in the short-run?

When average variable costs are greater than the price

24

When should a firm shut down in the long-run?

When average costs are greater than the price

25

When are economies of scale observed?

When long-run average costs fall as output rises

26

When are diseconomies of scale observed?

when long-run average costs rise as output increases

27

Constant returns to scale

When a proportional increase in all inputs leads to proportional output growth

28

Increasing returns to scale

When a proportional increase in all inputs leads to greater than proportionate growth in output

29

Returns to scale relate which 2 variables?

Inputs and outputs

30

Economies of scale relate which 2 variables?

Costs and output

31

Producer surplus =

Revenue minus variable costs

32

4 conditions for perfect competition

-homogenous product
-firms are price takers
-free entry and exit
-perfect information

33

When is allocative efficiency achieved?

Price = MC

34

Why is allocative efficiency achieved when price = MC?

possibilities for mutual gain through exchange are maximised

35

Why is it said that there are no fixed costs in the long-run?

Firms can exit the industry and avoid them

36

What is a Nash equilibrium?

-a situation in which each player is adopting a strategy which is a best response to the strategy actually played by their opponent
-a situation in which no player has an individual incentive to change their action, given what the other player is doing

37

In the Cournot model, firms set............

quantities simultaneously

38

(P - MC) / P =

Sum of market shares squared / Elasticity (+ve value)

39

Sum of market shares squared / Elasticity (+ve value) =

(P - MC) / P

40

Sum of market shares squared =

HHI

41

HHI =

Sum of market shares squared

42

What is one way to calculate the effective number of firms I a market?

1 / HHI

43

What is the strategic variable in Courtnot?

Quantity

44

What is the strategic variable in Bertrand?

Price

45

How can firms collude in the Courtnot model?

they can behave like a monopolist (single firm) to maximise joint profits and then divide up the spoils after

46

How can firms collude in the Bertrand model?

Agree to charge the same, inflated price

47

In what type of game is there an incentive to collude and why?

-repeated game
-because punishment strategies can be used to enforce collusive agreement

48

Why is the punishment for breaking a collusive agreement greater in the Bertrand model?

because if one firm lowers their price below the price of the other firm, the more expensive firm has zero demand and so loses a large amount of revenue

49

Factors that make collusion more likely

-smaller cost differential between firms
-less variable demand
-ease of monitoring rival firms' output levels
-fewer firms in the market

50

Conditions for a function to be well-behaved:

-Completeness (any 2 consumption bundles can be compared
-Reflexivity – any consumption bundle is at least as good as itself
-Transitivity
-Continuity – set of bundles to which X is preferred (and which are preferred to X) are ‘closed’

51

If a preference relation is well-behaved, we can..........

represent it as a mathematical function

52

Assumptions about preference orderings:

-Completeness
-More is better and all else equal, we therefore prefer more of a good to less
-Transitivity
-Convexity – so mixtures of goods are preferable to extremes (i.e. if you’re indifferent between two bundles A and B, convex preferences mean that you prefer the bundle with half of each)

53

Properties of indifference curves:

-Ubiquitous
-Downward-sloping
-Cannot cross
-Become less steep as we move down and to the right

54

Why must indifference curves be downward-sloping?

an upward sloping indifference curve would violate the more-is-better property by saying that a bundle with more of both goods yields the same utility as a bundle with less of both goods

55

Why can't indifference curves cross?

implies that we are indifferent between points on different indifference curves, which is not possible

56

Why do indifference curves become less steep as we move down and to the right?

implies a diminishing marginal rate of substitution and is due to the our diminishing marginal valuation of goods; we like variety

57

Marginal rate of substitution =

- MU1 / MU2 (marginal utilities)

58

What do indifference curves represent?

-the different combinations of x1 and x2 which produce the same amount of utility

59

What does the marginal rate of substitution represent?

the trade-off between the goods which leaves the consumer’s utility unchanged

60

Determinants of price elasticity of demand

-Substitution possibilities
-Share of total spending/budget
-Direction of income effect (dependent on whether it is a normal or inferior good because the income effect reinforces the substitution effect for a normal good but offsets it for an inferior good)
-Time

61

What is special about giffen goods?

positive own price elasticity

62

How do giffen goods have positive own price elasticity of demand?

Giffen goods are inferior goods and are so strongly inferior that the income effect is larger than the substitution effect

63

How could a price increase lead to an increase in demand?

-It is inferior
-It occupies a large % of a consumer’s spending
-An increase in its price leads to a significant reduction in real income
-It has a relatively small substitution effect, which is outweighed by its income effect

64

Complements have +ve or -ve cross price elasticity of demand?

negative

65

Substitutes have +ve or -ve cross price elasticity of demand?

positive

66

What is the substitution effect?

change in demand due to change in relative prices of 2 goods

67

What is the substitution effect represented by on a graph?

Slope

68

What is the income effect?

change in demand due to change in the consumer's purchasing power

69

What is the income effect represented by on a graph?

Area

70

What is the substitution effect sometimes called?

Change in compensated demand

71

Why is the substitution effect sometimes called the change in compensated demand?

The consumer is, in effect, being compensated for a price rise by having increased money income to bring him back to his original level of purchasing power so that the original bundle remains affordable

72

What is the slutsky equation in terms of derivatives?

Dx1/dp1 = dx1/dp1 (holding utility constant) – (dx1/dm * x1)

73

For someone who is initially a saver, what effect will a reduction in the interest rate have on consumption?

-substitution effect: consumption increases
-income effect: consumption decreases
-overall: unclear

74

For someone who is initially a borrower, what effect will a reduction in the interest rate have on consumption?

-substitution effect: consumption increases
-income effect: consumption increases
-overall: consumption increases

75

Graphically, what is the marginal rate of technical substitution?

The slope of the isoquant

76

HHI / elasticity (+ve value) =

Sum of market shares squared / Elasticity (+ve value)

77

Sum of market shares squared / Elasticity (+ve value) =

HHI / elasticity (+ve value)

78

Definition of a luxury good

Income elasticity of more than 1

79

Definition of a necessity good

Income elasticity of between 0 and 1

80

When is consumer surplus equal to CV and EV?

When there are no income effects