Final Exam Unit 3 Review Microeconomics

what is the foreign direct investment (FDI) ?

Investment made by a company or individual in one country in business interests in another country.

where is the horizontal (FDI)?

duplicating its home country operations in the foreign market, all stages of production are produced abroad, and can either offshore or outsource

where is the vertical FDI?

involves a company investing a different stage of the supply chain in another country

what is offshoring?

Moving a business to another country

what is outsourcing?

obtain (goods or a service) from an outside or foreign supplier, especially in place of an internal source.

what is the Ricardian model?

Highlighting that countries gain from trade by specializing in goods for which they have a lower relative opportunity cost, or comparative advantage

What does Autarky mean?

a situation in which a country does not trade with other countries

What is absolute advantage?

The ability to produce more of a good or service than competitors using the same amount of resources.

What is comparative advantage?

the ability to produce a good at a lower opportunity cost than another producer

how do I calculate opportunity cost?

implicit costs + explicit costs

how do I calculate opportunity cost via comparative advantage?

what you sacrifice (lost) / what you gain

true or false: Country with the lower opportunity cost has the comparative advantage

true

what are the other sources of comparative advantage?

factor abundance, factor intensity

factor endowments

the quantity and quality of labor, land, and natural resources of a country

true or false: A country that has an abundant supply of a factor of production will have a comparative advantage in goods whose production is intensive in that factor

true

what are the effects of IMPORTS on consumer/producer surplus based on the autarky line?

When a country imports goods, the domestic price falls from the autarky price to the lower world price

what are the effects of EXPORTS on consumer/producer surplus based on the autarky line?

When a country exports goods, the domestic price rises to the higher world price

what are the effects on IMPORTS for CONSUMER surplus based on the autarky line?

increases (consumers buy more goods at lower prices)

what are the effects on IMPORTS for PRODUCER surplus based on the autarky line?

decreases (domestic producers face competition from cheaper imports and reduce outputs)

what are the effects on EXPORTS for CONSUMER surplus based on the autarky line?

decreases (consumers face higher prices and consume less)

what are the effects on EXPORTS for PRODUCER surplus based on the autarky line?

increases (producers can sell at higher world prices

what is a sunk cost?

a cost that has already been incurred and cannot be recovered

what are the 8 common mistakes consumers make when making a decision?

1. misperceptions of opportunity costs

2. overconfidence

3. unrealistic expectations

4. counting dollars unequally

5. loss aversion

6. framing bias

7. fear of missing out (FOMO)

8. status quo bias

Misperceptions of opportunity costs

People tend to ignore opportunity costs when they are nonmonetary

overconfidence

the tendency to be more confident than correct

unrealistic expectations

Most of us are overly optimistic about our future behavior and level of discipline

counting dollars unequally

Mental accounting: the habit of mentally assigning dollars to different accounts so that some dollars are worth more than others.

Loss Aversion

an oversensitivity to loss that leads to an unwillingness to recognize a loss and move on

Framing Bias

The tendency of decision makers to be influenced by the way that problems are framed.

fear of missing out (FOMO)

excessive worry that others are having rewarding experiences that don't include you

staus quo bias

tendency to do nothing when faced with making a decision

what are the four categories of goods?

private, public, common resource, artificially scarce

What is a private good?

a good that is both rival and excludable (wheat)

What is a public good?

a good that is both nonrivalrous and nonexcludable (public sewer system)

What is a common resource good?

a good that is non-excludable and rival (water in a river)

what is a artificially scarce good?

a good that is excludable but nonrivialrous (on-demand movies on amazon prime)

how much of a public good should be provided?

Public goods should be produced until the marginal social cost is equal to the marginal social benefit.

what are the two categories of government programs?

poverty and public assistance programs

poverty programs, means tested

benefit individuals or families whose incomes fall below a certain level

poverty programs, in-kind benefit

a benefit in the form of goods or services (medicare)

public assistance programs, NOT means tested

Provide benefits based on criteria other than income, such as age, disability, or prior workforce contribution, acting as a social insurance rather than welfare

what does in-kind mean?

a service the government provides that is not in the form of money

what are the different way people can acquire health insurance?

1. out-of-pocket/employer

2. government (single payer)

Employment-based health insurance

a system in which an employer pays all or part of the health insurance premiums for the employee (no adverse selection)

government (single payer)

medicaid and medicare

what is medicaid?

health insurance for the poor

What is Medicare?

federal insurance program for elderly persons 65+ or persons with permanent disabilities

What is the Gini coefficient?

Measures income inequality within a country. Values between 0 (where everyone earns the same) and 1 (where one person earns all the money in a country)

Gini ratio formula

Area A / Area A + Area B

why do Americans pay more for healthcare?

we subsidized the health costs of the rest of the world, other countries freeload off of us

Death Spiral

Process that begins by attempting to increase price to meet reported product costs, losing market, reporting still higher costs, and so on, until the firm is out of business.

utility maximizing equilibrium

when the budget is exhausted and the marginal utility per dollar spent is the same for both goods

properties of consumer preferences

completeness, transitivity, more is better

Completeness

this property rules out the possibility that the consumer cannot decide which bundle is preferable

Transitivity

The ability to understand that relationships between two objects can extend to a third object.

More is better

all else being the same, more of a commodity is better than less of it

what is an indifference curve?

It is a curve that shows the combinations of consumption bundles that gives the consumer the same satisfaction (consumer doesn't know which combination to purchase)

what are the four properties of indifference curves?

1. indifference curves never cross

2. The further out an indifference curve lies (the further it is from the origin) the higher the level of utility

3. Indifference curves are down sloping

4. Convex to the origin

law of diminishing marginal utility

rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased

Marginal Rate of Substitution (MRS)

the rate at which a consumer would be willing to trade off one good for another and still maintain the same level of satisfaction

budget with indifference curves

the consumers equilibrium position is where the budget line is tangent to the indifference curve

what is the substitution effect?

when consumers react to an increase in a good's price by consuming less of that good and more of a substitute good

What is the income effect?

the change in consumption resulting from a change in real income

when are goods substitutes?

when the cross-price elasticity of demand is positive (they serve the same purpose an consumers replace one with the other)

when are goods complementary?

when the cross-elasticity of demand is negative (one product enhances the value of the other)

VMPL (Value of Marginal Product of Labor)

the contribution of an additional worker to a firm's revenues

VMPL > Wage

hire more workers

VMPL = Wage

optimal point to stop hiring workers

VMPL < Wage

firm should reduce its labor force until VMPL rises to equal the wage

MC = Wage

firm is a "wage taker" where the cost of hiring one more worker us simply that worker's wage

VMPL = Price x MPL

The Value of the Marginal Product of Labor ((VMPL) is the additional revenue a firm earns by employing one more unit of labor, calculated by multiplying the output price (P) by the Marginal Product of Labor (MPL).

MPL

change in Q/change in L

Cobb-Douglas production function

A production function that assumes some degree of substitutability among inputs.

Marginal Product of Capital (MPK)

Additional output from one more unit of capital.

Marginal Product (labor)

the change in output from hiring one additional unit of labor

compensating differential

a difference in wages that offsets differences in working conditions

efficiency wages

wages that employers set above the equilibrium wage rate as an incentive for better employee performance

subsistence and income affect of labor supply (substitution effect)

 a rise in the wage rate raises the opportunity cost of leisure. There is an incentive to work more, because leisure is relatively more expensive than working or consumption 

subsistence and income affect of labor supply (income effect)

a rise in the wage rate makes you richer. There is an incentive to work less and buy yourself more leisure, because leisure is a normal good 

what is private information?

information that some people have but others do not

what is asymmetric information?

one party to a transaction has more information than the other

What is moral hazard?

It refers to the actions people take after they have entered into a transaction that makes the other party to the transaction worse off.

What is adverse selection?

when information known by the first party to a contract or agreement is not known by the second and, as a result, the second party incurs major costs

how to mitigate moral hazard?

insurance companies

How to mitigate adverse selection?

screening and signaling

how does a deductible relate to mitigating moral hazard?

it is a sum that the insured individual must pay before being compensated for a claim (insurance companies deal with moral hazard by requiring a deductible: they compensate for losses only above a certain amount)

how does long-term reputation relate to mitigating adverse selection?

it allows sellers to reassure others that they aren't concealing adverse private information