Microeconomics: All Mnemonics

Question 1

Every society has to resolve three basic economic problems:

Answer 1

1. Which goods to produce and in what quantities?
2. How to produce the goods, which resources and what kind of production technology should be used?
3. For whom are the produced goods? Who will benefit from the economic efforts: the workers, the shareholders or the landlords?

Question 2

The Gini index

Answer 2

The Gini index (GI) measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line.
(GI = 0 perfect equality;
GI = 100 perfect inequality)

Question 3

experiments in economics: 3 methods

Answer 3

– natural experiments
(treatment varies through some naturally occurring event that happens to be exogenous to the outcome)
– quasi experiments
(intentional treatment, resemble randomized field experiments but lack full random assignment)
– randomized field experiments (treated and control group)

Question 4

Micro VS Macroeconomics

Answer 4

• Microeconomics focuses on the individual parts of the economy.
 How households and firms make decisions and how they interact in specific markets
• Macroeconomics looks at the economy as a whole.
 Economy-wide phenomena, including inflation, unemployment,
and economic growth

Question 5

The production possibilities frontier

Answer 5

The production possibilities frontier (PPF) is a graph that
shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

Question 6

Economics: the 8 basic principles

Answer 6

Principle 1: People Face Trade-Offs:

Principle 2: The Cost of something is what you give up to get it

Principle 3: Rational People think at the Margin

Principle 4: People respond to Incentives

Principle 5: Trade can make everyone better off

Principle 6: Markets are usually a good way to organize Economic Activity

Principle 7: Governments can sometimes improve Market Outcomes

Principle 8: An Economy’s Standard of Living depends on its Ability to produce Goods and Services

Question 7

competitive market

& prices

Answer 7

• A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.
• Buyers and sellers are price takers.

Question 8

competitive market’s

6 preconditions:

Answer 8

there are many buyers and sellers;
the goods and services are homogeneous;
no externalities (external costs and benefits) arise from the production and the consumption of goods;
Production factors are completely mobile; Markets are characterized by complete information;
There is competition among market participants.

Question 9

3 other market forms

Answer 9

• Monopoly
One seller that controls the price

• Oligopoly
Few sellers
Not always aggressive competition

• Monopolistic Competition
Many sellers
Slightly differentiated products (e.g. market for magazines)
Each seller may set price for its own product

Question 10

2 effects on demand

Answer 10

The income effect
Assume that incomes remain constant then a fall in the price of milk means that consumers can now afford to buy more with their income.

The substitution effect:
Milk is lower in price compared to other similar products so some consumers will choose to substitute the more expensive drinks with the now cheaper milk.

Question 11

4 types of goods based on demand dynamics

Answer 11

• Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other
• Complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other

Giffen good
• increase in price increases demand because of the income effect: if the price of bread rises, poor workers have less income available for meat and need to substitute with more bread

Veblen/Snob good
• we purchase things not because we need them but because we want to impress others with our purchasing power
P increases demand increases

Question 12

Excess demand / supply: alternative names

Answer 12

shortage / surplus

Question 13

income: 3 effects on demand

Answer 13

As income increases the demand for a normal good will
increase.
As income increases the demand for a luxury good will increase a lot.
As income increases the demand for an inferior good will decrease.

Question 14

Point versus Arc Elasticity

Answer 14

– Point elasticity measures elasticity at a point on the demand curve (small changes)

– Arc elasticity : Price elasticity of demand over a range of prices
Its formula is (midpoint formula)

Question 15

Budget constraint & Indifference curve:

defs + maximization of satisfaction

Answer 15

• Budget constraint: the limit on the consumption bundles that a consumer can afford
• Indifference curve: a curve that shows consumption bundles that give the consumer the same level of satisfaction
• Satisfaction is maximized when the marginal rate of substitution (of P for C) is equal to the ratio of the prices (of P to C)

Question 16

ordinal utility:

5 properties

Answer 16

 utility can only be used to rank alternatives as 1, 2, 3, and so on. For instance, an individual prefers a slice of cake than coffee, which implies that utility of slice of cake is given rank 1 and coffee as rank 2

 Utility cannot be measured directly, but only indirectly

 Utility can be revealed in people’s willingness to pay (WTP) for
different goods

 WTP reflects the value of a good, but not necessarily the level of satisfaction

 Assumption : marginal utility per dollar spent must be the same for all consumers

Question 17

4 assumptions of neoclassical economics

Answer 17

individuals always behave rationally, they have access to all
information,.. Consumers maximize utility
Managers maximize profits
Given constraints that they face, individuals make decisions by rationally weighing all costs and benefits, they optimize

Question 18

Behavioral economics:
def + 4 elements

Answer 18

• Behavioral economics
 a relatively new field in economics where economists make use of basic psychological insights to expand models of individual decision making

• Elements
 Bounded rationality
 Pro-social behavior and fairness
 Prospect theory
 Mental accounting

Question 19

Bounded rationality:

4 considerations

Answer 19

People make decisions using limited information and with cognitive constraints in processing information.
These imperfections suggest that humans should not be viewed as rational maximizers but as „satisficers“, where they choose options that are simply „good enough“.
Satisficers: those who make decisions based on securing a satisfactory rather than an optimal outcome
Manifestations of bounded rationality: choice overload (too many options); heuristic decision making (ex. use rule of thumb); failure to estimate statistical probabilities

Question 20

Pro-social behavior and fairness:

4 considerations

Answer 20

Studies have demonstrated that people seem to value fairness and often act pro-socially.
People do not consider only the own utility
People care about fairness
Homo oeconomicus versus homo socio-oeconomicus

Question 21

Prospect theory:

3 considerations

Answer 21

Decision theory formulated by two psychologists (Kahneman and Tversky ,1979)
Loss aversion (prefer avoiding losses to acquiring gains)
losses and gains are valued differently

Question 22

Mental accounting:

4 considerations

Answer 22

People have a tendency to separate money into different accounts based on different criteria (source and purpose). Having these accounts (account for households expenditures, account for holidays, account for cinema tickets,..) might provide the individual with more comfort but they might also be irrational
Endowment effect the value placed on something owned is greater than on an identical item not owned  Status-quo bias
Sunk costs (costs that cannot be recovered): Economic theory postulates that sunk costs should not be considered for a new decision. Only incremental costs should be considered. Empirical evidence: people tend to base their decisions on sunk costs. Ex.: Once you’ve begun watching a soccer game, the money you spent on the ticket is a sunk cost, whether you like or not the game
Money is fungible (interchangeable), however individuals sometimes do not treat money as fungible

Question 23

Production Function

Answer 23

Q = f (Capital, Labor, Energy)
• Indicates the highest output that a firm can produce for every specified combination of inputs given the state of technology, when operating efficiently

Question 24

Total factor productivity:
def and 3 determinants

Answer 24

Total factor productivity (TFP) can be defined as the ratio of a total output quantity measure to an index of total input quantity

• TFP can differ between firms at one point in time for the following reasons:
– Efficiency in the production
– Differences in return to scale
• Moreover TFP can differ between firms over time (ceteris paribus) for an additional reason:
– Technical change (frontier shift)

Question 25

Economic Profit & Total Cost: | Defs

Answer 25

Economic Profit = Total Revenue – Total Cost Total Cost = Explicit Cost + Implicit Cost

Question 26

efficient scale: def

Answer 26

The bottom of the U-shaped ATC curve occurs at the quantity that minimizes average total cost. This quantity is sometimes called the efficient scale of the firm.

Question 27

costs & time horizon | in 3 considerations

Answer 27

* In the short run, some costs are fixed. * In the long run, fixed costs become variable costs. * Because many costs are fixed in the short run but variable in the long run, a firm’s long-run cost curves differ from its short-run cost curves.

Question 28

3 types of returns to scale

Answer 28

• Economies of scale refer to the property whereby long-run average total cost falls as the quantity of output increases. • Diseconomies of scale refer to the property whereby long- run average total cost rises as the quantity of output increases. • Constant returns to scale refers to the property whereby long-run average total cost stays the same as the quantity of output increases

Question 29

isoquant & isocost lines: | defs + optimization

Answer 29

– Isoquant: a function representing all possible combinations of factor inputs that can be used to produce a given level of output – The isocost line: a line showing the different combination of factor inputs which can be purchased with a given budget - if the firm is minimizing costs, it will choose its factor inputs to equate the ratio of marginal products of each factor divided by its price.

Question 30

Welfare economics: | 2 properties + 3 study objects

Answer 30

Welfare economics  is the study of how the allocation of resources affects economic well-being  uses some techniques to estimate allocative efficiency: a resource allocation where the value of the output by sellers matches the value placed on that output by buyers Welfare economics analyzes  how the allocation of resources affects economic well-being  the impact of a change of a market condition on the welfare  the impact of an economic policy measure or a public investment (Cost-benefit analysis is a technique which is based on welfare economics)

Question 31

efficiency, Pareto efficiency & Pareto improvement: | defs

Answer 31

Efficiency: the property of a resource allocation of maximizing the total surplus received by all members of society; can be reached in competitive markets Pareto efficiency: This occurs if it is not possible to reallocate resources in such a way as to make one person better off without making anyone else worse-off Pareto improvement: when an action makes at least one economic agent better off without harming another economic agent

Question 32

6 main causes of market failure:

Answer 32

``` Efficiency: • Market power • Externalities • Public goods • Asymmetric information ``` Equity: • Redistribution and Merit Goods; • Unemployment, inflation and disequilibrium.

Question 33

2 possible outcomes of a price ceiling

Answer 33

 The price ceiling is not binding if set above the equilibrium price.  The price ceiling is binding if set below the equilibrium price, leading to a shortage.

Question 34

``` Free Rider problem: def & 3 considerations ```

Answer 34

• Free Rider : a person who receives the benefit of a good but avoid paying for it • The free rider problem prevents private markets from supplying public goods. • Solving the Free Rider Problem The government can decide to provide the public good if the total benefits exceed the costs. The government can make everyone better off by providing the public good and paying for it with tax revenue or introducing a fixed fee only for the users (local good).

Question 35

How to find the optimum amount of a public good? | in 2 steps

Answer 35

* The marginal social benefit (MSB) of a public good is the sum of individual benefits and is obtained by the vertical summation of the value each places on the marginal unit of the public good supplied. * Optimum: Intersection of marginal costs and marginal social benefits (MSB)

Question 36

``` Mixed public goods: def + how to finance them, in 2 cases ```

Answer 36

- non rival but excludable (highways, streets, national parks, bridges, theater,...) • Mixed public goods: Tax revenue or introducing a fixed fee only for the users. • Mixed public goods that become private goods (congestion): Tax revenue or introducing a fixed fee only for the users + time differentiated prices  Road pricing/Congestion charging

Question 37

``` Commons resources: def & "Tragedy" ```

Answer 37

- rival but not excludable, like: Air and water, Fish and animal populations, Minerals, Atmosphere Common resources tend to be used excessively when individuals are not charged for their usage.  Inefficiency Trade-off: Individual utility vs. Society‘s utility This is similar to a negative externality

Question 38

externality:

Answer 38

the cost or benefit of one person’s decision on the well-being of a bystander (a third party) which the decision maker does not take into account when making the decision

Question 39

Homo Oeconomicus VS Homo Socio-oeconomicus

Answer 39

``` Homo Oeconomicus (driving force behind individual action: self- interest) ``` Homo Socio-oeconomicus (driving force behind individual action: self- interest and common good)

Question 40

4 Policy Instruments for Environmental and Natural Resource Management:

Answer 40

• Voluntary/negotiated approaches/private solutions: voluntary agreement, Social norms of Moral Behavior, assign property rights • Traditional regulation (‘command & control’): Emission limits, technology standards, fuel quality standards ``` • Economic instruments (market-based-policies): Environmental taxes (e.g. pollution charges), Targeted subsidies, Tradable permits and rights, assigning property rights ``` • Public disclosure of information: Labeling (e.g. Minergie), public disclosure, or rating and certification

Question 41

Coase Theorem (definition):

Answer 41

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Question 42

2 types of standards:

Answer 42

– Technology-based standard – a standard that designates the equipment or method to be used – Performance-based standard – a standard that specifies performance

Question 43

Pigovian tax:

Answer 43

a tax enacted to correct the effects of a negative externality

Question 44

Marginal abatement cost:

Answer 44

the cost expressed in terms of the last unit of pollution non emitted (abated)

Question 45

4 examples of asymmetric / incomplete information

Answer 45

 seller or producer knows more about the quality of the product than the buyer  A worker knows more than his employer about how much effort he puts into the job  A seller of user cars or bikes knows more than the buyer about the car’s or bike’s conditions  Managers (agent) know more about costs, investment opportunities and competitiveness than firm owners (principal)

Question 46

``` Moral hazard: def in 4 considerations ```

Answer 46

Special case of asymmetric information the tendency of a person who is imperfectly monitored to engage in dishonest or undesirable behavior the person with more information has an incentive to take unfair advantage of the other a person or organization does not take the full consequences and responsibilities of its actions

Question 47

4 possible inequitable results of competitive markets:

Answer 47

Individual wealth and income inequality Regional wealth and income disparities High individual and regional wealth and income inequalities may not be accepted by the society High poor quote may not be accepted by the society

Question 48

``` Merit goods: def + 4 considerations ```

Answer 48

• Merit goods are goods like education which, in principle, could be provided by the market but are offered by the public sector because their consumption is assumed to be desirable by society. * These goods could also be provided without a state intervention. * In this case, the choice of public intervention is affected by social equity and not by criteria of efficiency. * " Public Service": production can be public or private. * Definition changes over time

Question 49

3 state functions:

Answer 49

Allocation: Monopoly Public goods Externalities Asymmetric information Distribution: Social disparities Regional disparities Stabilization: Economic crisis Growth problem

Question 50

Transfer payments | def

Answer 50

Transfer payments are government payments not made in exchange for a good or a service, e.g. pensions or unemployment benefits.

Question 51

4 sources of govt revenues:

Answer 51

Sale and leasing of goods and services. Contributions: - Taxes (obligatory withdrawal, not for specified services), - Fees (obligatory contributions, for specific services). Loans: the state may raise money from capital markets. These are not revenues in the original sense.

Question 52

at least 4 tax types:

Answer 52

Direct Tax: levied on income and wealth Indirect Tax: levied on the sale of goods and services Specific tax (tax on per unit of a good), ad valorem tax (tax levied as a percentage of the price of a good), Pigovian tax, value added tax, ... A lump-sum tax is a tax that is the same amount for every person, regardless of earnings or any actions that the person might take.

Question 53

The 2 costs & 3 effects of taxes:

Answer 53

The 2 costs:  Administrative burden on both side  Deadweight loss The 3 effects: 1) redistribute income and allow the supply of public goods and public services 2) cause market participants to substitute untaxed activities for taxed activities. 3) Decrease the consumption of an economic bad (e.g. anything that create a negative impact on consumers)

Question 54

4 principles for taxation:

Answer 54

* The benefits principle is the idea that people should pay taxes based on the benefits they receive from government services. * The ability-to-pay principle is the idea that taxes should be levied on a person according to how well that person can shoulder the burden. * Vertical equity is the idea that taxpayers with a greater ability to pay taxes should pay larger amounts. * Horizontal equity is the idea that taxpayers with similar abilities to pay taxes should pay the same amounts.

Question 55

3 actors & 5 effects in Public Choice Theory

Answer 55

3 actors: • Voters: Choices are based on self-interests • Politicians: Choices in order to attract votes in order to get re-elected • Bureaucrats: Likely to seek to represent the interests of their agency or government department. E.g. protecting their budgets 5 effects: • Rational ignorance effect: the tendency of a voter to not seek out information in order to make an informed choice in elections. • Special-interest effect: where benefits to a minority special-interest group are outweighed by the costs imposed to the majority. • Logrolling: the agreement between politicians to exchange support on an issue • Rent seeking: where individuals or groups take actions to redirect resources to generate income for themselves or the group. • Cronyism: a situation where the allocation of resources in the market is determined in part by political decision making rather than by economic forces.

Question 56

4 types of markets

Answer 56

Nr of firms? - 1: monopoly (Electricity, Tap water) - few: oligopoly (Steel, Crude Oil) - many: product type? - - differentiated: Monopolistic Competition (Gasoline, Cars) - - identical: Perfect Competition (Wheat, Milk)

Question 57

4 assumptions for the analysis of competitive markets:

Answer 57

* firms in perfectly competitive markets maximize their profits (Profits = Total Revenues – Total Cost). * Internal activities are done efficiently and that firms make the right decisions in order to maximize the economic profit. * Maximizing the market value of the firm is a more appropriate goal because market value includes the stream of profits that the firm earns over timedirect interest of shareholders (long-term). * Profit maximization could be short term oriented

Question 58

Firm’s Short Run Supply Curve

Answer 58

The portion of the marginal cost curve that lies above average variable cost is the competitive firm’s short run supply curve.

Question 59

The Long Run Market Supply with Entry and Exit

Answer 59

Firms will enter or exit the market until profit is driven to zero. In the long run, price equals the minimum of average total cost. The long run market supply curve is horizontal at this price.

Question 60

Long run market equilibrium without entry or exit barriers: | 3 properties

Answer 60

* At the end of the process of entry and exit, firms that remain must be making zero economic profit. * The process of entry and exit ends only when price and average total cost are driven to equality. * Long run equilibrium must have firms operating at their efficient scale.

Question 61

4(13)causes of increasing slope of long run supply curve

Answer 61

• Some resources used in production may be available only in limited quantities. • Firms may have different costs. • Resource rent • The marginal firm is the firm that would exit the market if the price were any lower This firm earns zero profit. Firms with lower costs than the marginal firm earn positive profit. Entry does not eliminate this profit because potential entrants have higher costs than firms already in the market.

Question 62

Deviations from firms' profit maximization: | 4 + 1 theories

Answer 62

• Managerial theories:  Divorce between ownership and control of firm activities  Agent may have different objectives than the principal. Contracts and monitoring are imperfect. Agents act in own rather than Principals’ interest  Managers maximize a utility function (salary, status, prestige, security, ...) - Williamson(1959)  Managers maximize the payment of dividends to satisfy the shareholders in the short-run • Behavioral theories:  The complexity of modern firms means that the maximization of any goal may be impossible to achieve

Question 63

Imperfect competition, Market power, Monopoly & Natural Monopoly: defs

Answer 63

* Imperfect competition exists where firms are able to differentiate their product in some way and so can have some influence on price * Market power where a firm is able to raise the price of its product and not lose all its sales to rivals * Monopoly : a firm that is the sole seller of a product without close substitutes * An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.

Question 64

1=3 causes of monopoly

Answer 64

• Barrier to entry: anything which prevents a firm from entering a market or industry, e.g.:  A key resource is owned by a single firm  The government gives a single firm the exclusive right to produce some good or service  Costs of production make a single producer more efficient than a large number of producers (economies of scale)

Question 65

competitive firm VS monopoly: | 4 differences

Answer 65

``` • Monopoly Is the sole producer Faces a downward-sloping demand curve Is a price maker Reduces price to increase sales ``` ``` • Competitive Firm Is one of many producers Faces a horizontal demand curve Is a price taker Sells as much or as little at the same price ```

Question 66

the 2 effects on a monopolist's total revenue as output increases

Answer 66

The output effect: more output is sold, so Q is higher. The price effect: price falls, so P is lower.

Question 67

The Welfare Cost of Monopoly, | in 3 considerations

Answer 67

* In contrast to a competitive firm, the monopoly charges a price above the marginal cost. * Because a monopoly sets its price above marginal cost, it places a wedge between the consumer’s willingness to pay and the producer’s cost. * This wedge causes the quantity sold to fall short of the social optimum.

Question 68

Price discrimination & Perfect Price Discrimination: defs

Answer 68

* Price discrimination - the business practice of selling the same good at different prices to different customers * Perfect Price Discrimination: a situation in which the monopolist knows exactly the willingness to pay of each customer and can charge each customer a different price

Question 69

4 considerations on price discrimination:

Answer 69

- It is a rational strategy for profit-maximizing monopolist who charges each customer a price closer to his/her willingness to pay - It requires the ability to separate customers according to their WTP ,e.g., by geography, age, income, time of use (peak time/off-peak time) etc. - might result in arbitrage – possibility to make profit from a price difference in two different markets - It can raise economic welfare! The increase in total welfare is due to higher producer surplus which shows up as higher profit for the monopolist.

Question 70

3 govt responses to monopolies:

Answer 70

 Making monopolized industries more competitive (cases with no natural monopoly situations) -> Antitrust law: rules and regulations prohibiting actions that restrain, or are likely to restrain, competition. (ex-ante-ex-post)  Doing nothing at all  Regulating the behavior of monopolies ( cases with natural monopoly situations) -> Regulation: control of price and quality through a regulatory authority (ex-ante)

Question 71

Two part tariff :

Answer 71

the company fixes a tariff to cover its overheads (one part of its fixed cost) and adds a variable tariff to cover marginal cost. (the allocation of resources is also efficient , price is set to equal marginal cost)

Question 72

4 Attributes of Monopolistic Competition:

Answer 72

- Many sellers: There are many firms competing for the same group of customers. (e.g. Books, CDs, restaurants) - Product differentiation: Each firm produces a product that is at least slightly different from those of other firms. Rather than being a price taker, each firm faces a downward-sloping demand curve. - Free entry and exit: Firms can enter or exit the market without restriction, i.e. the number of firms in the market adjusts until economic profits are zero. - The cross-price elasticities of demand are large but not infinite.

Question 73

Monopolistic competition in short & long run: | 2 properties each

Answer 73

In the short run: - a monopolistically competitive firm chooses its quantity and price just as a monopoly does - economic profit can be above or below zero In the long run: - As in a monopoly, price exceeds marginal cost. - As in a competitive market, price equals average total cost.

Question 74

Monopolistic vs. Perfect Competition: | 2 diffs

Answer 74

- mark-up over marginal cost | - excess capacity: production happens below efficient scale

Question 75

Regulating monopolistic competition? | Discussion in 4 points

Answer 75

•Monopolistic competition does not have all the desirable properties of perfect competition. - There is the normal deadweight loss of monopoly pricing in monopolistic competition caused by the mark-up of price over marginal cost. - The number of firms in the market may not be the “ideal” one. There may be too much or too little entry. • The administrative burden of regulating the pricing of all firms that produce differentiated products would be overwhelming.

Question 76

Advertising: | reason, size, 2 critiques & 3 defenses

Answer 76

Reason: When firms sell differentiated products and charge prices above marginal cost, each firm has an incentive to advertise in order to attract more buyers to its particular product. Size: Firms that sell highly differentiated consumer goods typically spend between 10 and 20 percent of revenue on advertising. • 2 Critiques: - Firms advertise in order to manipulate people’s tastes. - Advertising impedes competition by implying that products are more different than they really are. • 3 Defences - Advertising provides information to consumers. - Advertising increases competition by offering a greater variety of products and prices. (Today an accepted theory!) - The willingness of a firm to spend advertising dollars can be a signal to consumers about the quality of the product being offered.

Question 77

Brands: | def, 1 critique, 2 defenses

Answer 77

* Branding - “the means by which a business creates an identity for itself and highlights the way in which it differs from its rivals” * Critics argue that brand names cause consumers to perceive differences that do not really exist. * Economists have argued that brand names may be a useful way for consumers to ensure that the goods they are buying are of high quality. - providing information about quality. - giving firms incentive to maintain high quality.

Question 78

Contestable markets theory: | def, key point

Answer 78

* New theory incorporated to explain changes in the way businesses actually operate in the real world * Key characteristics of a perfectly contestable market is that firms are influenced by the threat of new entrants into a market

Question 79

5 contestable markets theory examples

Answer 79

• entry limit pricing – keep prices lower to deter new entrant • predatory pricing – held prices below average cost for a period to try and force out competitors or prevent new firms • impose other artificial barriers to prevent entry like operating at over-capacity to flood the market and drive down prices • Competitive Advantage: the advantages firms can gain over another which have the characteristics of being both distinctive and defensible • Cream-Skimming: a situation where a firm identifies parts of a market that are high in value added and seeks to exploit those markets

Question 80

6 features of oligopoly

Answer 80

– Small number of firms or – Small number of firms control the market – Product differentiation may or may not exist – Barriers to entry – High concentration – Interdependence: one firm does has some influence on the others; reaction function

Question 81

Collusion, cartel & consequence

Answer 81

- Collusion: An agreement among firms in a market about quantities to produce or prices to charge. - Cartel: A cartel is an organization of independent firms which decide to coordinate their individual activities explicitly • If oligopolists arranged themselves to maximize profits with respect to the implicit collusion, price and quantity would be the same as in a monopolistic market.

Question 82

Prisoner's dilemma: | the 2 defining features

Answer 82

• Type of game where - Each player has an incentive, independent of what the other player does, to cheat - When both players cheat, both are worse off than if they had chosen different actions

Question 83

The dominant strategy:

Answer 83

The dominant strategy is the best strategy for a player to follow regardless of the strategies chosen by the other players.

Question 84

Game theory, strategic decisions, Nash equilibrium: | defs

Answer 84

• Game theory is - the study of how people behave in strategic situations characterized by incomplete information about the intentions of other people - Study of behavior in situation of interdependence * Strategic decisions are those in which each person, in deciding what actions to take, must consider how others might respond to that action. * Nash equilibrium: a situation in which economic actors choose their best strategy given the strategies of other actors

Question 85

5 factors in the formation and 1 in the persistence of cartels

Answer 85

• Price Elasticity: the more inelastic the demand curve facing the cartel, the higher the price that the cartel can set and the greater its profit. • Market entry of firms • Moderate expected penalties • Low organizational cost: The more complex the negotiations and the coordination efforts are, the higher is the cost to form a cartel. • Effectiveness of the competition law and of the competition commission • In general, economic instability within the cartel‘s life increases the probability of its breakdown.

Question 86

3 Sources of comparative advantages

Answer 86

* Differences in climate (example: Vietnam producing shrimp) * Differences in factor endowments (example: forest products canada) * Differences in technology

Question 87

1=6 assumptions of the comparative advantages theory

Answer 87

• Perfect competition  There are no transport costs, no external costs.  Costs are constant and there are no economies of scale. Increasing the amount of all inputs used in the production of any commodity will increase output of that commodity in the same proportion.  There are only two economies producing two goods.  The theory assumes that traded goods are homogeneous.  Factors of production are assumed to be perfectly mobile within a country but no movement internationally.  There are no tariffs or other trade barriers.

Question 88

Innovations of new trade theory + consequences

Answer 88

increasing returns to scale, network effects, products differentiation , love of variety, transport costs, environmental costs, imperfect competition... ➘ welfare conclusions on the effects of trade policies can be different

Question 89

benefits of trade: | 3 considerations

Answer 89

* If people own different resources/goods and/or have different skills/desires, trade will be possible and beneficial to every participant. * If one participant were worse off by agreeing to the trade, that participant would prefer not to make the deal. * Interdependence and voluntary trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.

Question 90

Tariff & Import Quota

Answer 90

Tariff: tax on goods produced abroad and sold domestically. Import Quota: limit on the quantity of a good that can be produced abroad and sold domestically.

Question 91

5 more benefits of trade

Answer 91

Increased variety of goods Lower costs through economies of scale Increased competition Enhanced flow of ideas Economic growth

Question 92

5 arguments to restrict trade

Answer 92

 Jobs -> social, industrial & relocation policies instead!  National Security  Infant Industry  Unfair Competition  Environment and trade