# Microeconomics 1

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- Created by: Nyle Patel
- Created on: 10-05-17 18:17

What is the relationship between AC and MC, holding w and r constant

MC(Q)AC(Q), AC is rising; MC(Q)=AC(Q), AC is flat

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What is the relationship between EOS and RtS and AC

EOS - AC falls, increasing RtS; DEOS - AC rises, decreasing RtS; Min point AC is minimum efficient scale, Flat AC=Constant RtS

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What 5 Conditions synonymous with a PC market

A-undifferentiated products, B-Perfect information, C-consumer has no market power, D-producer has no market power, E-all firms have equal access to resources

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How do the conditions explain a PC market

A+B, Law of one price. C+D, Price Taker. E, free entry for all firms

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What is the profit max condition

MR=MC, MC rising

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What is the SR in relation to PC market

Period which firms plant size and no of firms in industry are fixed

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What is the SR Supply Curve

NSFC=0. P=SMC, q>0; P=0, q=0

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What is the shutdown price

price below which q=0, min point on AVC

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How does SR supply shift

shifts right in no of firms increase

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What is the LR in relation to PC market

period in which all inputs can be adjusted and no of firms can change

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What is a firm’s LR Supply Curve

P=MC for P>Ps. 0 for P

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What is the LR market equilibrium

LR profit max, P=MC; Zero Economic Profit P=AC; Qd(P*)=n*q*

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How do you solve for P* in LR Equilibrium

Set MC=AC to find q*, and sub into P*=MC

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How do you solve for Q* in LR Equilibrium

Set MC=AC to find q*, and sub into Qd

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How do you solve for n* in LR Equilibrium

Set MC=AC to find q*, and sub into Qd(P*)=n*q*

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What is LR market supply curve

Horizontal line corresponding to min of LRAC, if P>min LRAC, if P

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Describe LR industry supply curves

constant cost=horizontal, increasing cost=upslope, decreasing cost=downslope

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What is Economic Rent

diff between max value willing to pay for input and its reservation value

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What is an inputs reservation value

returns that inputs owner can get by using input in next best alternative

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What is producer surplus

diff between amount received for good and min amount willing to accept

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What is economic efficiency

total surplus is maximised

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What is DWL

reduction in net economic benefits resulting from inefficiency

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How are elasticity and MR related

Elastic(E0; Inelastic(E>-1), MR

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What is market power

agent has market power if they can affect the market price by their own actions

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What is the Lerner Index of Market Power

((P-MC)/P). 0=PC, 1=monopolist

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What is a cartel

group of firms that collusively determine P and Q in a market

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What is a natural monopoly

market where TC incurred by a single firm producing Q is less than the combined TC of 2 or more firms producing the same level of Q

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What are the 3 types of barrier to entry

Structural- occur when incumbent firms have cost or demand advantages over newcomers; Legal- incumbent legally protected from comp; Strategic - incumbent takes explicit steps to deter entry

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What is the profit max condition for a monopsony

MRPL=MEL

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What is the monopsony equilibrium condition

(MRPL-w)/w =1/PESL

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What is the best response

player 1’s strategy x is the best response given player 2 chooses y

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What is the Nash Equilibrium

Player 1’s strategy is the best response and player 2’s strategy is the best response

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What is a mixed strategy

Strategy of playing one of two or more actions according to pre specified probabilities

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What is the Grim Trigger Strategy in the Repeated Prisoner Dilemma

one episode of cheating by one player trigger permanent breakdown of cooperation for remainder of game

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What is the *** for Tat Strategy in the Repeated Prisoner Dilemma

you do to your opponent what they did to you the previous turn

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Likelihood of cooperation increases if…

Players are patient; interactions are frequent; cheating is easy to detect; one time gain from

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How do you calculate EV in a lottery

[P(A) x A] + [P(B) x B] + ….

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How do you calculate Variance in a lottery

Var=[(A-EV)^2] xP(A) + [(B-EV)^2] xP(B) +…..

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How do you evaluate riskiness

compare EV, Var and Expected Utility (EU=P(A) x U(A) + P(B) x U(B) +….)

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What is the Risk Premium

Necessary diff between EV of Lottery and a sure thing so decision maker is indifferent between them.

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How is Risk Premium calculated

p x U(A) + (1-p) x U(B) = U(pA+(1-p)B - RP)

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What is the demand for insurance

fairly priced policy is one which insurance premium (price) = EV of promised payout

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What is Supply for Insurance

group of risk averse individuals can pool risk, works when risks have some independence

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What is Moral Hazard

Opportunism by which an informed person takes advantage of a less informed person through an unobserved action

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What is Adverse Selection

Opportunism characterised by an informed person benefitting from trading with a less informed person

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How do you calculate the proportion of polices that claim

those who buy, r>price/premium. those who claim, EV between r and 1, (1+r)/2

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What is a private value

bidder has their own personalised valuation

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What is a common value

Object has an intrinsic value, but no buyer knows exact value. each buyer receives private signal or estimate

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What is the difference between competitive market and social optimum

Comp, P=MPC. Social, P=MSC

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How can you restore optimality in a competitive market

emissions standards(quota), emissions fee(tax) Subsidies, Property Right

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What is a property right

legal rule that describes what economic agents can do with an object or idea

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What is Coarse Theorem

Assigning property rights result in the efficient outcome (joint profits max) who gets the rights affect the income distribution

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What are the challenges of restoring optimality by property right

transaction costs may be high; large no of injured parties; incomplete or asymmetric information

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What does Rival mean

only one person can consume the good (used up in consumption)

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What does exclusion mean

one person consuming a good prevents others from consuming

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What is the demand for a public good

Vertical sum of individual demand curves

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How do you find equilibrium for public goods

MSB=MC

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What are the solutions to the free rider problem

social pressure; gov action; transformation to private good

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## Other cards in this set

### Card 2

#### Front

What is the relationship between EOS and RtS and AC

#### Back

EOS - AC falls, increasing RtS; DEOS - AC rises, decreasing RtS; Min point AC is minimum efficient scale, Flat AC=Constant RtS

### Card 3

#### Front

What 5 Conditions synonymous with a PC market

#### Back

### Card 4

#### Front

How do the conditions explain a PC market

#### Back

### Card 5

#### Front

What is the profit max condition

#### Back

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