Final Exam Study Guide Chapter 13 Costs of Production explicit costs input costs that require an outlay of money by the firm implicit costs input costs that do NOT require an outlay of money by the firm economic profit total revenue total costs including explicit implicit accounting profit total revenue explicit cost economies of scale property whereby long run average total cost falls as the quantity of output increases diseconomies of scale property whereby long run average total cost rises as the quality of output increases constant returns to scale property whereby long run average total cost stays the same as the quantity of output changes Chapter 14 Firms in Competitive Markets competitive market market with many buyers sellers trading identical products so that each buyer seller is a price taker for competitive firms marginal revenue price profit maximizing Q and P is where MC MR firm operates at a loss when P is less than ATC firm shuts down is P is less than AVC Chapter 15 Monopoly Monopoly firm that is the sole seller of a product without close substitutes Marginal revenue is always less than demand The output effect More output is sold so Q is higher which tends to increase total revenue The price effect The price falls so P is lower which tends to decrease total revenue Efficient Q is found where demand MC monopoly Q is found where MC MR P lies on demand curve Single price monopoly firm sells each unit for the same price to all customers Price discrimination selling the same good at different prices to different customers Chapter 17 Oligopoly oligopoly market structure in which only a few sellers offer similar or identical products game theory study of how people behave in strategic situations collusion agreement among firms in a market about quantities to produce or prices to charge cartel a group of firms acting in unison Nash equilibrium economic factors interacting with one another each choose their best strategy given the strategies that all the other factors have chosen oligopoly price is less than the monopoly price but greater than the competitive price which equals marginal cost The output effect Because price is above marginal cost selling 1 more gallon of water at the going price will raise profit The price effect Raising production will increase the total amount sold which will lower the price of water and lower the profit on all the other gallons sold prisoners dilemma a particular game between 2 capture prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial dominant strategy a strategy that is best for a player in a game regardless of he strategies chosen by the other players Chapter 22 Uncertainty Information Asymmetry Uncertainty expected value expected average value of an event if it is repeated many times calculated by taking every outcome and adding the probabilities together risk averse person prefers a less risky situation holding fixed its expected value Asymmetric Information asymmetric information one side of an economic relationship has more information than another hidden characteristics known only to one side of the transaction used cars insurance hidden actions actions taken by one side of an economic relationship real estate agents doctors prescribing extra tests adverse selection tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party buyer isn t sure if car is plum or lemon so does not buy screening action taken by uninformed party to induce informed party to reveal information signaling action taken by informed party to reveal information to uninformed party warranty moral hazard tendency of a person who is imperfectly monitored to engage in dishonest behavior agent person who is performing an act for another person principal person for whom another person agent is performing some act
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