micro test 2

rational spending rule

the tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point

rational spending

spending should be allocated across goods so that the marginal utility per dollar is the same for each good

consumer surplus

difference between a buyer’s reservation price for a product and the price actually paid

accounting profit

total revenue-explicit cost

economic profit

total revenue-explicit cost-implicit cost

normal profit

accounting-economic profit

allocative function of price

changes in prices direct resources away from overcrowded markets and toward markets that are underserved

invisible hand theory

Adam Smith’s theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources

pure monopoly

the only supplier of a unique product with no close substitute

monopolistic competition

industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another

oligopoly

an industry structure in which a small number of large firms produce products that are either close or perfect substitutes

natural monopoly

monopoly that results from economies of scale (increasing returns to scale)

hurdle method of price discrimination

the practice by which a seller offers a discount to all buyers who overcome some obstacle

perfect hurdle

a threshold that completely segregates buyers whose reservation prices lie above it from others whose reservation prices lie below it; imposing no cost on those who jump the hurdle

cost-plus regulation

a method of regulation under which the regulated firm is permitted to charge prices that cover explicit costs of production plus a markup to cover the opportunity cost of resources provided by the firm’s owners

dominant strategy

one that yields a higher payoff no matter what the other players in a game choose

Nash equilibrium

any combination of strategy choices in which each player’s choice is his or her best choice; given the other players’ choices

prisoner’s dilemma

a game in which each player has a dominant strategy and when each plays it; the resulting payoffs are smaller than if each had played a dominated strategy

cartel

a coalition of firms that agree to restrict output for the purpose of earning an economic profit

repeated prisoner’s dilemma

a standard prisoner’s dilemma that confronts the same players repeatedly

tit-for-tat

a strategy for the repeated prisoner’s dilemma in which players cooperate on the first move and then mimic their partner’s last move on each successive move

commitment problem

a situation in which people cannot achieve their goals because of an inability to make credible threats or promises

commitment device

a way of changing incentives so as to make otherwise empty threats or promises credible

homo economicus

the narrowly self-interested. well-informed. highly disciplined. And cognitively formidable actor often assumed in traditional economic models

fungibility

the property of an entity whose individual units are interchangeable as money in separate accounts

judgmental and decision heuristics

rules of thumb that reduce computation costs

availability heuristic

a rule of thumb that estimates the frequency of an event by the ease with which it is possible to summon examples from memory

representativeness heuristic

rule of thumb according to which the likelihood of something belonging to a given category increases with the extent to which it shares characteristics with stereotypical members of that category

regression to the mean

the phenomenon that unusual events are likely to be followed by more nearly normal ones

anchoring and adjustment

an estimation technique that begins with an initial approximation (the anchor) which is then modified in accordance with additional available information (the adjustment)

Weber-Fechner law

the relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus

loss aversion

the tendency to experience losses as more painful than the pleasures that result from gains of the same magnitude

status quo bias

the general resistance to change often stemming from loss aversion

present-aim standard of rationality

a variant of the rational choice model that permits greater flexibility in assumptions about preferences

adaptive rationality standard

variant of the rational choice model that permits additional preferences to be added if they can be shown not to handicap resource acquisition in competitive environments

ultimatum bargaining game

a game in which the first player has the power to confront the second player with a take-it-or-leave-it offer

positional good

a good whose value depends relatively heavily on how it compares with other goods in the same category

means-tested

a benefit program whose benefit level declines as the recipient earns additional income

negative income tax (NIT)

a system under which the government would grant every citizen a cash payment each year financed by an additional tax on earned income

in-kind transfer

a payment made not in the form of cash but in the form of a good or service

When a monopolist is charging every consumer their specific reservation price, we refer to it as:

perfect price discrimination

Because firms with higher opportunity costs/marginal costs can produce as prices rise, the Supply Curve tends to be:

upward sloping

in the long run we expect economic profit to be

0

no one can be made better off without making someone else worse off. We describe this situation as:

pareto efficient

A game will always have at least _ Nash Equilibria 

1

A game modelling oligopoly where two or more firms simultaneously set their output quantities is called:

Cournot competition

A game modelling oligopoly where two or more firms simultaneously set their prices is called:

bertrand competition

Mathematically, the key to solving oligopoly competition is finding each firm's:

best response function