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