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Microecon Exam 3

ECON 221, Gordanier (USC) Exam 3

QuestionAnswer
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