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Microeconomics Midterm 3
time to get trosty
48
Economics
Undergraduate 2
11/29/2010

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Cards

Term
Adverse selection
Definition
if you don’t know if a product is good or bad, you are not willing to pay a high price – this pushes good products out of the market (aka hidden characteristics).
Term
Moral hazard
Definition
when one party in a contract passes the risk or cost involved with their behavior on to the other party (insurance).
Term
Principal-Agent problem
Definition
occurs when the agent’s goals differ from the principal’s and the agents behavior cannot be observed (aka hidden behavior)
Term
Federal Trade Commission (FTC)
Definition
A federal regulatory group created by Congress in 1914 to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful “unfair” behavior, and to issue cease-and-desist orders to those found in violation of antitrust law.
Term
Department of Justice
Definition
also empowered to act against violators of antitrust laws. It initiates action against those who violate antitrust laws and decides which cases to prosecute and against whom to bring criminal charges (FTC cannot bring criminal charges).
Term
Government Agencies that enforce anti-trust laws
Definition
FTC and DOJ
Term
Role of Government
Definition
They promote competition and restrict market power, primarily through antitrust laws, and

they restrict competition by regulating some industries. Price floors and ceiling are examples of this, as are the current interventions into the banking, auto and insurance industries. These are often meant to protect either the public or certain industries.
Term
Sherman Anti-trust Act
Definition
“Every contract, combination, or conspiracy in restraint of trade or commerce is declared to be illegal.”
“Every person who shall enter into any contract or conspiracy and be found guilty will be charged with a felony (used to say misdemeanor) and ... be fined .. and / or imprisoned”
Term
Pure Monopoly
Definition
One firm controls the market
Block entry
Term
Derived Demand
Definition
demand for inputs is “derived” from the demand for the outputs that require those inputs.
Term
marginal revenue product (MRP)
Definition
The
additional revenue a firm earns by employing one additional unit of input, ceteris paribus.
Term
Marginal Revenue Product of Labor:
Definition
MRPL = MPL x PX
Term
Marginal Revenue Product of Capital:
Definition
MRPK = MPK x PX
Term
profit-maximizing amount of labor to hire
Definition
MRPL=Wage
Term
Households supply:
Definition
labor, land, and capital
Term
Savings vs. consumption
Definition
cost of saving is present consumption. Cost of present consumption is future consumption
Term
capital
Definition
Those goods produced by the economic system that are used as inputs to produce other goods and services in the future.
Term
depreciation
Definition
The decline in an asset’s economic value over time.
Term
important sources of market failure
Definition
imperfect market structure, or noncompetitive behavior,
the existence of public goods,
the presence of external costs and benefits, and
imperfect information.
Term
public goods (social or collective goods)
Definition
Goods that are nonrival in consumption
and/or their benefits are nonexcludable (or nonexclusive).
Term
nonrival in consumption
Definition
One person’s enjoyment of the benefits of a public good does not interfere with another’s consumption of it.
Example: National Defense
Term
nonexclusive
Definition
Once a good is produced,
no one can be excluded from enjoying its benefits.
Example: Public art, national defense
Term
Natural Monopoly
Definition
Nonrival but exclusive
With congestion: private goods
Provided by private sector or government
Term
Opportunity Cost of Leisure
Definition
The wage reate
Term
Income Effect
Definition
As the wage increases, the worker’s real income rises, and the demand for leisure will rise.
Term
Free-Rider Problem
Definition
Term
Substitution Effect
Definition
Higher wage encourages more work because other activities now have a higher opportunity cost
Term
Income effect
Definition
Higher wage raises a workers income increasing the demand for all normal goods including leisure so quantity supplied to market work decreases
Term
Backward bending supply curve
Definition
Income effect eventually dominates substitution effect reducing the quantity of labor supplied as the wage increases
Term
Why wage differs
Definition

1. Differences in training, education, age, and expirence

2. Differences in ability

3. Differences in Risk

4. Geographic Differences

5. Discrimination 

Term
Labor Union
Definition
A group of workers who organize to improve their terms of employment
Term
Craft Union
Definition
a union whose members have a particular skill or work at a particular craft, such as plumbers of carpenters
Term
Collective Bargaining
Definition
the process by which union and management negotiate a labor agreement
Term
intangible capital  
Definition

Nonmaterial things that contribute to the output of future goods and services.

Term
human capital  
Definition
 A form of intangible capital that includes the skills and other knowledge that workers have or acquire through education and training and that yields valuable services to a firm over time.
Term
change in capital stock
Definition
investment-depreciation
Term
investment
Definition
New capital additions to a firm’s capital stock. Although capital is measured at a given point in time (a stock), investment is measured over a period of time (a flow). The flow of investment increases the capital stock
Term
Investment by firms
Definition
demand for capital
Term
Saving by households
Definition
supply of capital
Term
interest rate
Definition
A fee paid annually expressed as a percentage of the loan or deposit.
Term
interest
Definition
The payments made for the use of money
Term
bond
Definition
A contract between a borrower and a lender, in which the borrower agrees to pay the loan at some time in the future, along with interest payments along the way.
Term
A firm will keep investing until
Definition
marginal revenue product of capital is equal to the price of capital, or MRPK = PK
Term
Marginal rate of return =
Definition
MRP/MRC
Term
externality
Definition
A cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction. Sometimes called spillovers, third-party effects, or neighborhood effects.
Term
Winner's Curse
Definition
The plight of the winning bidder who overestimates an asset's true value
Term
marginal damage cost (MDC)
Definition
The additional harm done by increasing the level of an externality-producing activity (consumption or production) by one unit.
Term
marginal private cost (MPC)
Definition
The cost of consumption or production paid by the consumer or firm.
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