Managerial Economics – Exam 2 – Flashcards
Unlock all answers in this set
Unlock answersquestion
Negative Externality
answer
Cost borne by parties who are not involved in the production or consumption of a good
question
Positive Externality
answer
Benefit gained by parties who are not involved in the production or consumption of a good
question
Social Marginal Cost
answer
the added cost of covering the negative externality
question
Spot Exchange
answer
an informal relationship between a buyer and a seller in which neither party is obligated to adhere to specific terms for exchange
question
Contract
answer
a formal relationship between a buyer and a seller that obligates the buyer and seller to exchange at terms specified in a legal document
question
Vertical Integration
answer
a situation where a firm produces the inputs required to make its final product
question
Transaction Costs
answer
costs associated with acquiring input that are in excess of the amount paid to the input supplier
question
Specialized Investment
answer
an expenditure that must be made to allow two parties to exchange, but has little or no value in any alternative use
question
Relationship-Specific Exchange
answer
a type of exchange that occurs when the parties to a transaction have made specialized investments
question
Perfectly Competitive Market
answer
1. Many Buyers and Sellers 2. Each firm produces a homogenous product 3. Buyers and Sellers have Perfect Information 4. There are no transaction costs 5. There is free entry & exit -- No Firm Can influence the Price of the Product -- Firms earn ZERO ECONOMIC PROFIT -- Price is determined by the intersection of the supply and demand curves
question
Firm Demand Curve
answer
the demand curve for a firm's individual product; in a perfectly competitive market, it is simply the market price
question
Marginal Revenue
answer
the change in revenue attributable to the last unit of output; for a competitive firm, MR is the market price
question
Profits of a Perfectly Competitive Firm
answer
Profits = PQ - C(Q)
question
Monopoly
answer
a market structure in which a single firm serves an entire market for a good that has no close substitutes
question
Economies of Scale
answer
exist when long-run average costs decline as output increases
question
Diseconomies of Scale
answer
exist when long-run average costs increase as output increases
question
Economies of Scope
answer
exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms
question
Cost Complementaries
answer
exist when marginal cost of producing one output is reduced when the output of another product is increased
question
Deadweight Loss of Monopoly
answer
the consumer and producer surplus is lost due to the monopolist charging a price in excess of marginal cost
question
Monopolistically Competitive Market
answer
1. There are MANY buyers and sellers 2. Each firm produces a differentiated product 3. There is FREE entry & exit -- Products are close, but not perfect substitutes
question
Price Discrimination
answer
the practice of charging different prices to consumers for the same good or service
question
First-Degree Price Discrimination
answer
charging each consumer the maximum price he or she would be willing to pay for each unit of the good purchased
question
Second-Degree Price Discrimination
answer
the practice of posting a discrete schedule of declining prices for different ranges of quantities
question
Third-Degree Price Discrimination
answer
charging different groups of consumers different prices for the same product
question
Two-Part Pricing
answer
a pricing strategy in which consumers are charges a fixed fee for the right to purchase a product, plus a per-unit charge for each unit purchased (ie. Costco) Entry Fee = Full Amount of Surplus @ 1st degree pricing structure Per Unit Fee = Marginal Cost
question
Peak-Load Pricing
answer
a pricing strategy in which higher prices are charged during peak hours than during off-peak hours
question
Oligopoly
answer
a market structure in which there are only a few firms, each of which is large relative to the total industry
question
Duopoly
answer
an oligopoly composed of only two firms
question
Cournot Oligopoly
answer
1. There are FEW firms serving MANY customers 2. Firms produce differentiated OR homogenous products 3. Each firm believes rivals will HOLD their output constant if the firm changes its output 4. Barriers to ENTRY exist -- Managers make output decisions and believe that their decisions do NOT affect the output decisions of rival firms -- Regardless of homogenous or differentiated products, industry output is lower than the socially efficient level due to the equilibrium price EXCEEDING marginal cost
question
Best-Response Function
answer
a function that defines the profit-maximizing level of output for a firm
question
Cournot Equilibrium
answer
a situation in which neither firm has an incentive to change its output given the other firms output
question
Bertrand Oligopoly
answer
1. There are FEW firms serving MANY customers 2. Firms produce IDENTICAL products at a CONSTANT marginal cost 3. Firms compete in PRICE and react optimally to competitors' prices 4. Consumers have PERFECT information 5. There are NO transactional costs 6. Barriers to ENTRY exist -- From the viewpoint of the firm manager - Bertrand Oligopoly is undesirable and leads to ZERO economic profits, even if there are only 2 firms in the market
question
Simultaneous-Move Game
answer
game in which each player makes decisions without knowledge of the other players' decisions
question
Sequential-Move Game
answer
game in which one player makes a move after observing the other player's move
question
Normal-Form Game
answer
a representation of a game indicating the players, their possible strategies, and the payoffs resulting from alternative strategies
question
Dominant Strategy
answer
a strategy that results in the highest payoff to a player regardless of the opponent's action
question
Iteratively Dominant Strategy
answer
a strategy that is dominant once you eliminate dominated strategies for other players
question
Dominated Strategy
answer
a strategy that is always worse then another strategy for any specific action of other players
question
Nash Equilibrium
answer
a condition describing a set of strategies in which no player can improve his/her payoff by unilaterally changing his/her own strategy, given the other players' strategies
question
Aggregate Payoff
answer
The total payoff per "block" for all players combined
question
Infinitely-Repeated Game
answer
a game that is played over and over again forever and in which players receive payoffs during each play of the game ** If (Net Gain)(Int. Rate) > Future net loss per period ... then CHEAT **
question
Net Present Value of Future Cash Flow
answer
Amount / interest rate
question
Trigger Strategy
answer
a strategy that is contingent on the past play of a game and in which some particular past action "triggers" a different action by a player ** Only for FINITE games with a KNOWN ending **
question
Extensive-Form Game
answer
a representation of a game that summarizes the players, the information available to them at each stage, the strategies available to them, the sequence o moves and the payoffs resulting from alternative strategies
question
Marginal Revenue (Perfect Competition)
answer
MR = P = MC
question
Marginal Cost (Perfect Competition)
answer
MC = P = MR
question
Marginal Revenue (Monopoly)
answer
MR = P (1+E/E)
question
Demand Curve (Monopoly)
answer
P(Q) - a + bQ
question
Marginal Revenue Curve (Monopoly)
answer
MR = a + 2bQ
question
Price (Monopoly)
answer
P = MC (|E|/|E|-1)
question
Demand Curve (Cournot Oligopoly)
answer
P = a - b(q1 + q2)
question
Total Revenue (Cournot Oligopoly)
answer
TR = [a - b(q1 + q2)]q1
question
Marginal Revenue (Cournot Oligopoly)
answer
MR = a - 2bq1 - bq2
question
Marginal Cost (Cournot Oligopoly
answer
MC = c
question
Best Response Function
answer
(a - c / 2b) - (q2 /2) = q1
