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Microecon Exam 3
ECON 221, Gordanier (USC) Exam 3
| Question | Answer |
|---|---|
| Compounding Interest | Earned interest on interest |
| Future Value | Today's amount(1+rate of growth)^Number of years |
| Rule of 70 (Definition) | How long it will take an amount to double |
| Rule of 70 (Equation) | 70/r*100 |
| Present Discounted Values | Today's value of tomorrow's money |
| Internal Rate of Return | r that makes equation equal 0 |
| Financial Assets | Stocks and bonds |
| Bonds | Govenment IOU's; auctioned off at a rate and then repayed at a higher rate a few years later |
| 3 options of businesses holding stock | 1. Put money back in business 2. Hold onto it 3. Return to stockholders (Dividends) |
| Dividend | Money company returns to stockholders in return from profit |
| What would you be willing to pay for a share of stock? | PDV of all future dividends |
| Formula for Infinite Time | x/r (MUST start from 1) |
| Efficient Market Hypothesis | All known info about a stock is reflected in the price. To beat market, need to know something that the market doesn't know (Ex: Knowing that stock will rise from $2 to $10 when no one else does) |
| 2 Components of a Firm's Profit | 1. Revenue 2. Production Cost |
| Short Run | Period of time during which at least 1 of the firm's inputs is fixed (Ex: size of factory) |
| Long Run | Period of time long enough to allow firm to vary all of its inputs, to adopt new technology, and increase size of physical plant |
| Total Cost | Fixed cost + variable cost |
| Marginal Cost (Definition) | Change in firm's total cost from producing one more unit |
| Marginal Cost (Equation) | Change in Total Cost/Change in Quantity |
| Average Cost | Cost (Total, variable, or fixed)/quantity |
| Variable Cost (in rlation to marginal cost) | Sum of all different marginal costs |
| When marginal cost is above Average Variable Cost, AVC _____ | Increases |
| Marginal Product of Labor | Change in total output/change in labor |
| Average Fixed Cost (Equation) | ATC-AVC |
| Profit (Equation) | Revenue-Cost |
| Perfect Cometition | Must be price takers; market sets price |
| Max Profit | MC=P; Above AVC |
| How low does profit have to get before it is more profitable to just cloe down and loose the fixed costs? | Price below AVC |
| Long Run Options | 1. Exit- Do not pay fixed costs; profit<0 2. Entry- Enter with same costs; profit>0 |
| Long Run Equilibrium | No desire for further entry or exit; everything stable; profit=0 |
| What price makes profit 0? | MC=AVC; Minimum of ATC curve |
| Monopoly | NOT price takers; can control where they are on the demand curve (sell fewer units, higher price or more units, lower price) |
| What quantity maximizes profit? | MR=MC |
| Why is monopoly inefficient? | Don't pick efficient output level; restrict output to get increased price |
| Monopoly by Merger | Buy out everyone else |
| Natural Monopolies | Single firm has a cost advantage |
| Government Decree | Governemtn only lets ONE party produce good; patents |
| Control of Natural Resources | Ex: diamond market |
| Becoming a Monopoly (4 methods) | 1. Monopoly by merger 2. Natural monopoly 3. Government decree 4. Control of natural resources |
| 3 ways t correct a monopoly | 1. Efficient price regulation 2. Zero Profit pricing 3. Efficient price- subsidy given |
| Efficient Price Regulation | Tell monopolies what they can charge |
| Why does a supply curve not exist for monopolies? | They set their own price and quantities |
| Average Fixed Cost (Equation) | ATC-AVC |
| Profit (Equation) | Revenue-Cost |
| Perfect Cometition | Must be price takers; market sets price |
| Max Profit | MC=P; Above AVC |
| How low does profit have to get before it is more profitable to just cloe down and loose the fixed costs? | Price below AVC |
| Long Run Options | 1. Exit- Do not pay fixed costs; profit<0 2. Entry- Enter with same costs; profit>0 |
| Long Run Equilibrium | No desire for further entry or exit; everything stable; profit=0 |
| What price makes profit 0? | MC=AVC; Minimum of ATC curve |
| Monopoly | NOT price takers; can control where they are on the demand curve (sell fewer units, higher price or more units, lower price) |
| What quantity maximizes profit? | MR=MC |
| Why is monopoly inefficient? | Don't pick efficient output level; restrict output to get increased price |
| Monopoly by Merger | Buy out everyone else |
| Natural Monopolies | Single firm has a cost advantage |
| Government Decree | Governemtn only lets ONE party produce good; patents |
| Control of Natural Resources | Ex: diamond market |
| Becoming a Monopoly (4 methods) | 1. Monopoly by merger 2. Natural monopoly 3. Government decree 4. Control of natural resources |
| 3 ways t correct a monopoly | 1. Efficient price regulation 2. Zero Profit pricing 3. Efficient price- subsidy given |
| Efficient Price Regulation | Tell monopolies what they can charge |
| Why does a supply curve not exist for monopolies? | They set their own price and quantities |
| Zero Profit Pricing | Price where ATC crosses Demand |
| What is the most common way that natural monopolies are regulated? | Zero Profit Pricing |
| Efficient Profit Pricing | give subsidy=fixed cost |
| In a normal monopoly, which way/s of regulation can be used? | Ony the first (efficient price regulation) |
| Difference between the cost curves of a normal monopoly vs a natural monopoly | Natural- downward sloping cost Normal- U shaped |
| Firms in perfect competition produce where? | Price=MC |
| Monopolies produce where? | MC=MR |
| Cartel | Multiple firms attempting to coordinate behavior |
| Quantity where cartels produce | Quantity monopoly/number of firms |
| Why is cheating an issue with cartels? | Massive profit incentive |
| Cartel Options (4) | 1. Everyone cheats 2. Everyone cooperates 3. Only one firm cheats 4. Everyone cheats except one firm |
| If everyone cheats the cartel |
Created by:
brewerr3
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