Microeconomics 1

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What is the relationship between AC and MC, holding w and r constant
MC(Q)AC(Q), AC is rising; MC(Q)=AC(Q), AC is flat
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What is the relationship between EOS and RtS and AC
EOS - AC falls, increasing RtS; DEOS - AC rises, decreasing RtS; Min point AC is minimum efficient scale, Flat AC=Constant RtS
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What 5 Conditions synonymous with a PC market
A-undifferentiated products, B-Perfect information, C-consumer has no market power, D-producer has no market power, E-all firms have equal access to resources
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How do the conditions explain a PC market
A+B, Law of one price. C+D, Price Taker. E, free entry for all firms
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What is the profit max condition
MR=MC, MC rising
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What is the SR in relation to PC market
Period which firms plant size and no of firms in industry are fixed
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What is the SR Supply Curve
NSFC=0. P=SMC, q>0; P=0, q=0
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What is the shutdown price
price below which q=0, min point on AVC
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How does SR supply shift
shifts right in no of firms increase
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What is the LR in relation to PC market
period in which all inputs can be adjusted and no of firms can change
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What is a firm’s LR Supply Curve
P=MC for P>Ps. 0 for P
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What is the LR market equilibrium
LR profit max, P=MC; Zero Economic Profit P=AC; Qd(P*)=n*q*
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How do you solve for P* in LR Equilibrium
Set MC=AC to find q*, and sub into P*=MC
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How do you solve for Q* in LR Equilibrium
Set MC=AC to find q*, and sub into Qd
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How do you solve for n* in LR Equilibrium
Set MC=AC to find q*, and sub into Qd(P*)=n*q*
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What is LR market supply curve
Horizontal line corresponding to min of LRAC, if P>min LRAC, if P
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Describe LR industry supply curves
constant cost=horizontal, increasing cost=upslope, decreasing cost=downslope
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What is Economic Rent
diff between max value willing to pay for input and its reservation value
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What is an inputs reservation value
returns that inputs owner can get by using input in next best alternative
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What is producer surplus
diff between amount received for good and min amount willing to accept
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What is economic efficiency
total surplus is maximised
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What is DWL
reduction in net economic benefits resulting from inefficiency
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How are elasticity and MR related
Elastic(E0; Inelastic(E>-1), MR
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What is market power
agent has market power if they can affect the market price by their own actions
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What is the Lerner Index of Market Power
((P-MC)/P). 0=PC, 1=monopolist
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What is a cartel
group of firms that collusively determine P and Q in a market
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What is a natural monopoly
market where TC incurred by a single firm producing Q is less than the combined TC of 2 or more firms producing the same level of Q
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What are the 3 types of barrier to entry
Structural- occur when incumbent firms have cost or demand advantages over newcomers; Legal- incumbent legally protected from comp; Strategic - incumbent takes explicit steps to deter entry
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What is the profit max condition for a monopsony
MRPL=MEL
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What is the monopsony equilibrium condition
(MRPL-w)/w =1/PESL
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What is the best response
player 1’s strategy x is the best response given player 2 chooses y
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What is the Nash Equilibrium
Player 1’s strategy is the best response and player 2’s strategy is the best response
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What is a mixed strategy
Strategy of playing one of two or more actions according to pre specified probabilities
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What is the Grim Trigger Strategy in the Repeated Prisoner Dilemma
one episode of cheating by one player trigger permanent breakdown of cooperation for remainder of game
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What is the *** for Tat Strategy in the Repeated Prisoner Dilemma
you do to your opponent what they did to you the previous turn
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Likelihood of cooperation increases if…
Players are patient; interactions are frequent; cheating is easy to detect; one time gain from
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How do you calculate EV in a lottery
[P(A) x A] + [P(B) x B] + ….
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How do you calculate Variance in a lottery
Var=[(A-EV)^2] xP(A) + [(B-EV)^2] xP(B) +…..
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How do you evaluate riskiness
compare EV, Var and Expected Utility (EU=P(A) x U(A) + P(B) x U(B) +….)
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What is the Risk Premium
Necessary diff between EV of Lottery and a sure thing so decision maker is indifferent between them.
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How is Risk Premium calculated
p x U(A) + (1-p) x U(B) = U(pA+(1-p)B - RP)
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What is the demand for insurance
fairly priced policy is one which insurance premium (price) = EV of promised payout
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What is Supply for Insurance
group of risk averse individuals can pool risk, works when risks have some independence
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What is Moral Hazard
Opportunism by which an informed person takes advantage of a less informed person through an unobserved action
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What is Adverse Selection
Opportunism characterised by an informed person benefitting from trading with a less informed person
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How do you calculate the proportion of polices that claim
those who buy, r>price/premium. those who claim, EV between r and 1, (1+r)/2
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What is a private value
bidder has their own personalised valuation
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What is a common value
Object has an intrinsic value, but no buyer knows exact value. each buyer receives private signal or estimate
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What is the difference between competitive market and social optimum
Comp, P=MPC. Social, P=MSC
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How can you restore optimality in a competitive market
emissions standards(quota), emissions fee(tax) Subsidies, Property Right
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What is a property right
legal rule that describes what economic agents can do with an object or idea
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What is Coarse Theorem
Assigning property rights result in the efficient outcome (joint profits max) who gets the rights affect the income distribution
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What are the challenges of restoring optimality by property right
transaction costs may be high; large no of injured parties; incomplete or asymmetric information
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What does Rival mean
only one person can consume the good (used up in consumption)
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What does exclusion mean
one person consuming a good prevents others from consuming
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What is the demand for a public good
Vertical sum of individual demand curves
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How do you find equilibrium for public goods
MSB=MC
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What are the solutions to the free rider problem
social pressure; gov action; transformation to private good
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Other cards in this set

Card 2

Front

What is the relationship between EOS and RtS and AC

Back

EOS - AC falls, increasing RtS; DEOS - AC rises, decreasing RtS; Min point AC is minimum efficient scale, Flat AC=Constant RtS

Card 3

Front

What 5 Conditions synonymous with a PC market

Back

Preview of the front of card 3

Card 4

Front

How do the conditions explain a PC market

Back

Preview of the front of card 4

Card 5

Front

What is the profit max condition

Back

Preview of the front of card 5
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