Microeconomics Flashcards

Chapter 10: Monopolistic Competition, Oligopoly, and Game Theory

• Monopolistic Competition
  • The term "monopolistic" refers to the fact that each firm produces a unique version of the product.
  • Profit maximization in the short run requires pricing the good where marginal revenue equals marginal cost.
  • New entry causes price to decrease and profits to decrease.
  • If marginal revenue is 5, marginal cost is 7, and average total cost is 4, the firm should reduce output and increase price to maximize profits.
  • In the long run, price equals average total cost, and marginal revenue equals marginal cost (P = ATC and MR = MC).
• Oligopoly
  • An example of an oligopoly is mobile wireless providers in California.
  • Characteristics of Oligopoly
    • High barriers to entry.
    • A few large firms dominating the industry.
    • Economic profits can be greater than zero in the long run.
    • Goods may be standardized.
  • Compared with a competitive market, a cartel as a whole will produce less output to increase prices.
  • If two firms form a cartel and one firm cheats by producing more, the cheating firm's revenue rises, and the non-cheating firm's revenue falls.
    • Example: If an industry produces 12 units at 10 each and then 13 units at 9 each, one firm cheating by producing one extra unit would gain \$3 while the other firm would lose \$6.
• Game Theory
  • Basic setup includes: information, strategies, and payoffs.
  • Mistakes are NOT part of the basic setup.
  • Golf and bargaining games are examples of sequential-move games.
  • A dominant strategy exists for a player if they perform better regardless of what the other player does.
  • A Nash equilibrium results from each player using a best-response strategy to all other players and represents an outcome where no player can improve their payoff by unilaterally changing their strategy.
  • A Nash equilibrium may NOT maximize all players' expected payoffs and may NOT give each player the highest possible payoff in the game.
  • There can be more than one Nash equilibrium in a game.
  • Prisoner's Dilemma
    • Both players would be better off by cooperating, but not cooperating is a dominant strategy.
    • The dilemma can potentially be avoided if the game is repeated over and over under the same conditions.

Chapter 11: The Labor Market

• Labor Supply
  • Reservation Wage: The minimum wage a person requires to accept a job. (e.g., Janice requires \$40,000, otherwise, she won't take the job.)
  • When an individual labor supply curve bends backward, the income effect is stronger than the substitution effect.
  • A reduction in nonwage income would shift the market labor supply curve to the right.
  • Only the individual labor supply curve will bend backward at high wages.
  • At a certain quantity of labor supplied, the income effect can exactly offset the substitution effect indicated by a bend in the labor supply curve.
• Marginal Revenue Product
  • Marginal Revenue Product: The additional revenue generated by hiring one more unit of labor. (e.g., Jeff can install four systems per month, and each system is priced at \$1,000. If he hires an assistant, a total of ten systems can be installed. Thus, hiring the assistant increases his monthly revenue by \$6,000).
• Factors Affecting Labor Demand
  • An increase in Web-based medical services that allow patients to self-diagnose minor illnesses (the rise of telehealth) is most likely to decrease the demand for labor in the nursing industry.
  • As more hotels introduce online check-in and keyless room entry, the elasticity of demand for hotel front-desk staff is likely to rise.
  • If the government eases restrictions on the immigration of scientists and engineers, equilibrium wages would fall, and labor quantity would rise.
  • If worker safety regulations were abolished (making work conditions more dangerous), wages would rise, and labor quantity would fall.
• Economic Discrimination
  • Gary Becker's theory suggests that employers who successfully discriminate in their hiring practices will earn less profits because they must pay more for labor.
  • In a segmented labor market, the wage gap between the two markets is represented as the difference between the wages in each market.
  • Women earning less money in a career that offers flexible work hours is least likely to be an example of labor discrimination.
• Unions
  • Unions tend to increase wage differentials between a union and non-union sector by restricting entry into union-sector jobs.
• Trends in Labor Markets
  • An increase in trade protectionism policies to restrict outsourcing of jobs is not a trend of labor markets over the past 50 years.
  • Steel manufacturing is least likely to expand in demand over the next decade.

Chapter 12: Land, Capital Markets, and Innovation

• Factors of Production
  • Land includes natural resources.
  • An axe used to cut down trees in a forest is not categorized as “land” as a factor of production but is rather capital.
  • If the supply of loanable funds increases, the marginal revenue product of capital (MRPK) that would be needed in order to break even would fall.
• Present Value
  • If an asset pays \$300 per year forever, its present value at a 6% interest rate is \$5,000 (Present Value = Payment / Interest Rate, PV = \frac{300}{0.06} = 5000).
  • For a scholarship of \$1,000 today and \$1,000 next year, the present value at a 10% interest rate is \$1,909 (PV = 1000 + \frac{1000}{1.10} = 1909).
  • When interest rates rise, for the present value of an asset to remain the same, the amount of the income stream needs to rise, and/or the cost of capital needs to fall.
• Financial Capital
  • Issuing shares of stock involves giving up ownership in a company.
  • The main advantage of issuing stock to raise financial capital is the limited liability of risk.
  • When a bond's rating goes from AAA to C, the price of the already-issued bonds will likely fall, increasing its yield.
• Human Capital
  • When interest rates rise, human capital investment becomes less worthwhile.
  • When choosing to pursue college full-time, costs that must be taken into account in a benefit-cost analysis include tuition and forgone earnings during the time in college.
  • As one progresses through their working life, the average income tends to rise then fall, holding the level of education constant.
  • Traveling to Beijing to study Chinese to pursue a job at a consulate is an example of human capital investment.
  • People who believe that success in one's career depends largely on one's innate intellect and work ethic would argue that a college education is useful to the extent that it allows people to signal their natural talents.
• Intellectual Property
  • The name of a famous basketball player is NOT an example of an intellectual property right.
• Entrepreneurship
  • An important tradeoff that entrepreneurs face in their decision-making is profit versus risk.
• Innovation
  • Innovation leads to a higher average standard of living, a greater variety of goods and services, and an ability to use scarce resources more efficiently.
  • Innovation does NOT increase the inherent amount of land and natural resources available.

Chapter 13: Externalities and Public Goods

• Externalities
  • Flu shots create an external benefit because they reduce the spread of the flu. The externality generated by flu shots is more similar to that provided by landscaping than the externality generated by smoking.
  • Subsidies are generally used when a positive externality is present.
  • Coase Theorem: If transaction costs are low, private bargaining will result in an efficient solution to the issues of externalities.
    • Example: You don't like mangos and the fallen mangos from your neighbor's mango tree make it harder to mow your lawn, and you incur a cost of \$500. Your neighbor values the tree at \$300, and if the neighbor has a legal right to keep the tree and bargaining is possible, it would be most efficient outcome if you paid your neighbor \$400 to cut the tree down.
  • When an activity has a private marginal benefit of D1, a private marginal cost of S1, and a positive externality, then the social marginal benefit is represented by a curve (D2) that is above D1.
  • If, due to externalities, marginal social costs exceed marginal private costs at a particular quantity in the production of a good, then production of the good is greater than the socially efficient amount.
• Public Goods
  • A public good is nonrival in consumption and nonexcludable.
  • A common property resource is nonexcludable but rival.
  • Streaming a movie on Amazon is an example of a service that is excludable and nonrival in consumption.
  • Environmental protection is a pure public good.
  • The free rider problem typically results in a production of output that is less than the social optimal quantity.
  • If an unregulated industry generates pollution, the market price is less than the socially optimal price, and the market quantity is greater than the socially optimal quantity.
• Pollution Reduction Policies
  • Carbon restrictions are not a market-based policy to reduce pollution.
• Valuing the Future
  • When people place a high value on ensuring a cleaner environment for future generations, the future is discounted at a relatively low rate.
• Externalities
  • Externalities are the impacts on third parties.
• Global Climate Change
  • Global climate change is described as a public good because it is subjected to the free rider problem.
  • Global warming is described as a large negative externality with a long time horizon.
  • An increase in the natural carbon absorption system is NOT a consequence of global warming.

Chapter 15: Income Inequality and Poverty

• Income vs. Wealth
  • Wages are the most common form of income in the U.S. economy.
• Income Distribution
  • Suppose that the five residents of a small village have the following incomes: \$10,000; \$20,000; \$30,000; \$40,000; \$50,000. The proportion of total income earned by the lowest two quintiles is 30%, and the proportion earned by the highest two quintiles is 70%.
• Gini Coefficient
  • A Gini coefficient corresponds to a Lorenz curve that is bowed furthest away from the 45-degree line corresponds to one closer to 1. An equal distribution results in a Ginni coefficient of 0, while complete inquality results in a Ginni coefficient of 1.
  • Income redistribution efforts such as progressive taxation and transfer payments will typically decrease income inequality, which means that the Gini coefficient will fall.
• Causes of Income Inequality
  • The choice of city where one lives is generally is not a common cause of income inequality.
• Poverty Measurement
  • The poverty thresholds in the United States are largely based on an adjusted measure of prices of food.
  • Poverty is least likely to be eliminated when using a relative poverty threshold.
  • If the poverty threshold for a family of four is \$24,000 and the Shoenfelds earned \$21,000, their income deficit is \$3,000 and their ratio of income to poverty is 0.875.
  • If the poverty threshold for a household of 3 persons is \$20,000 and the Shermans earn \$22,000, they would be classified as not poor.
• Rawlsian Economics
  • A Rawlsian economist would not support a reduction in capital gains taxes benefiting high-income earners.
• Lorenz Curve
  • The futher the lorenz curve from the 45 degree line the greater the income inequality.