Econ exam 2

external costs

costs that buyers/sellers don’t pay or even consider

coass theorem

reach solution through side payments, can go either way, get to the point of msc

pigovian tax

gov imposed tax to move to socially optimal equillibrium, based on externality

subsidies

for msb, opposite of tax

non excludable

can’t exclude someone from using it

non rival

when someone is using it, it doesn’t deter others from also using

aggregate demand

sum vertically (p = form)

tragedy of the commons

higher profit for you = higher social costs for others

average tax rate

total tax paid as share of before tax income

marginal tax rate

tax paid on last dollar earned, progressive tax

shutdown decision

firm shuts down when revenue no longer covers variable cost

econ revenue

total rev - financial costs - implicit op costs (key to start up and shut down)

marginal product of labor

how much output you get for one hour of a worker working

legal market power

may be given to firms by the governemnt (tm/copyright)

natural market power

control key resources

price effect

price rises, demand drops

output effect

lower price = more sales = higher revenue

marginal revenue

derivative of total revenue / derivtative of quantity (twice slope demand curve w same intercept)

price discrimination

firms charging different consumers different prices

perfect price discrimination

each customer pays reservation value, no dwl

group pricing

3rd degree, change dif price based on group you’re in

second degree

price based on characteristics of the purchase, give discounts to those who clear hurdles

anti-trust

breaking up monopolies to restore competition

incentive to innovate

benefit of monopolies

product differentiation

convincing customer rival product is not a perfect substitute

nash equilibrium

combo of strategies in which each is the best response to the strategies of others, no one wishes they could change their mind

expected payoff

sum of product of the probability and payoff from each outcome

best response

highest payoff given strategies by other players

dominant strategy

provides highest payoff to player regardless of what other players do

dominant strategy equilibrium

no one wants to deviate from their strategy

prisoner’s dilemma

two people act in their own self interst and fail to cooperate even when its in their collective interest to do so

coordination game

players benefit from aligning their actions

anti-coordination game

players benefit from choosing different actions (chicken)

bertrand competition

firms compete by setting prices

bertrand nash equilibrium

price = marginal cost

expected payoff

E(p) = ½ x 0 + ½ - 2

extensive form game

sequential termination, game tree, start from end and work backward

first mover advantage

play 1 dictates eventual outcome

grim strategy

plan to price at marginal cost if competitor cheats