Managerial Economics Exam 2

question

Economies of Scale

answer

f long-run average costs fall with output, you have increasing returns to scale of economies of scale

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Dieconomies of Scale

answer

if long-run average costs rise with output, you have decreasing returns to scale or diseconomies of scale.

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Constant

answer

if long-run average costs are constant with respect to output, then you have constant returns to scale.

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Purchasing

answer

firms might be able to lower average costs by buying the inputs required for the production process in bulk or from special wholesalers

question

Managerial

answer

firms might be able to lower average costs by improving the management structure within the firm. The firm might hire better skilled or more experienced managers.

question

Diminishing returns to scale

answer

predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually results in smaller increases in output

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Fixed costs

answer

when a business needs to purchase new capital equipment or other (fixed costs)

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Lower levels of productivity

answer

at a certain point, hiring an additional worker can be counterproductive and lower productivity levels.

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Limited demand

answer

a firm may hire an additional worker to satisfy demand, but they may not cover the full output that the employee is capable of. An employee may be able to produce 10 units but there is only demand for 5 therefore the employee only produces 5.

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Negative impact on working environment

answer

employing more people can disrupt others.

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Short run

answer

...

question

What causes diminishing returns of scale?

answer

Fixed costs, lower levels of productivity, limited demand, negative impact on working environment, short run

question

Marginal productivity

answer

refers to the extra output, return, or profit yielded per unit by advantages from production inputs. Inputs can include things like labor and raw materials.

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Marginal costs

answer

the cost added by producing one additional unit of a product or service.

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Relationship between marginal productivity and marginal costs

answer

they are inversely related to each other: as one increase, the other will automatically decrease proportionally and vice versa. The relationship between marginal cost and marginal product can be attributed to the law of diminishing returns.

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What effects marginal productivity?

answer

adding more factors/inputs such as labor and raw materials

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Average cost

answer

calculates the effect on the total unit due to the change in output level

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Marginal cost

answer

calculated to find out if producing one extra unit of product is profitable or not

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Less

answer

When marginal cost is ____________ than average cost, average cost falls

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Greater

answer

when marginal cost is ___________ than average cost, average cost rises.

question

What is the typical shape of MC?

answer

Upward-sloping

question

Economies of scope

answer

exist when average costs fall as output increase/means that production of one good reduces the cost of producing another related good.

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Why do economies of scope occur

answer

occur when producing a wider variety of goods or services in tandem is more cost effect for a firm than producing less of a variety, or producing each good independently.

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How are economies of scope related to mergers

answer

products that share the same inputs or that have complementary productive processes offer great opportunities for economies of scope through diversification. Merging or acquiring another company is a way to achieve economies of scale. Two retail chains may merge with each other to combine different product lines and reduce average warehouse costs.

question

Excess demand

answer

causes the price to rise, and as price rises producers are willing to sell more, thereby increasing output

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Excess supply

answer

causes price to fall, and as price falls producers are willing to supply less of the good, thereby decreasing output.

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What are changes/shifts in demand?

answer

describes a shift in consumer desire to purchase a particular good or service, irrespective of a variation in its price. The change could be triggered by a shift in income levels, consumer tastes, or a different price being charged for a related product.

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Change in demand

answer

refers to increase or decrease in demand of a product due to various determinants of demand, while keeping price at constant

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Change in quantity demanded

answer

Refers to change in the quantity purchased due to increase or decrease in the price of a product

question

What are some causes of demand changes

answer

shift in income levels, consumer tastes, or a different price being charged for a related product.

question

Market prices

answer

_________ ______________convey a signal to increase or decrease quantity supplied or quantity demanded. It also provides potential business opportunities.

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Shortage

answer

When a certain kind of product is in ______________ supply and the price rises, people will pay more attention to a produce this kind of product.

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Prices

answer

The information carried by_____________ is an essential function in the fundamental coordination of an economic system, coordinating things such as what has to be produced, how to produce it and what resources to use in its production.

question

What kind of markets are prices important in ?

answer

Competitive markets/Market economy

question

Controllable changes in demand

answer

price, advertising, warranties, product quality, distribution speed, service equality, and prices of substitute or complementary products also owned by the company

question

Uncontrollable changes in demand

answer

can't be controlled such as the weather, the prices of other products from competing markets, purchasing capital, and distribution of wealth.

question

Increase

answer

If both demand and supply ____________, there will be an increase in the equilibrium output, but the effect on price cannot be determined.

question

Decrease

answer

If both demand and supply ____________, there will be a decrease in equilibrium output, but the effect on price cannot be determined.

question

Market makers

answer

refers to a firm or individual who actively quotes two-sided markets in a particular security, producing bids and offers along with the market size of each. They buy low and sell high.

question

Why are market makers needed?

answer

they provide liquidity and depth to markets

question

When do market makers profit?

answer

they profit from the difference in the bid-ask spread.

question

Indifference principle

answer

if an asset is mobile, then in the long-run equilibrium, the asset will be indifferent about where it is used; that is, it will make the same profit no matter where it goes

question

How do changes in the desirability of an occupation impact its wage relative to another occupation

answer

if school teaching is more attractive than truck driving some truck drivers will become school teachers, increasing supply and reducing the wage for school teachers, but decreasing supply and increasing the wage for truck drivers. When all professions are equally attractive, the migration stops, and the wages stop moving.

question

Compensating wage differential

answer

once equilibrium is reached, differences in wages reflect differences in the inherent attractiveness of various professions.

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Mobile

answer

Labor and capital are generally highly ____________ assets. They flow into an industry when profits are high and out of an industry when profits are negative.

question

long run equilibrium

answer

Once this _________ ______ _________________ is reached, capital is indifferent about where it goes because it earns the same return (its opportunity cost) regardless of the industry.

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Mean reversion

answer

Suggests that performance eventually moves back toward the mean or average

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Characteristics of a competitive industry

answer

◦ Firms produce a product or service with very close substitutes, meaning demand is very elastic
◦ Firms have many rivals and not cost advantages
◦ The industry has no entry or exit barriers
◦ The demand curve for the output of a perfectly competitive firm is flat (perfectly elastic).
◦ A competitive firm cannot affect price, so there is little a competitive firm can do except react to industry price.

question

How does the degree of competition in a market impact the demand curve

answer

The demand curve is perfectly elastic or flat

question

Can monopolies earn profits

answer

◦ Monopolies produce a product or service with no close substitutes
◦ Monopolies have no rivals
◦ Barriers to entry prevent other firms from entering the industry
◦ Unlike a competitive firm, a monopoly firm can earn positive profit — an above average rate of return — for a relatively long time. This profit is a reward for doing something unique, innovative, or creative — something that give the firm less elastic demand.
◦ In the long run, even monopolies profit is drive to zero.

question

Bubbles

answer

increase in demand and a decrease in supply. Both changes tend to increase price. Once people form expectations about future price increases, these expectations tend to become self-fulfilling.

question

Bubbles

answer

emerge when investors disagree about the importance of big economic events. Because it is easier to place financial bets on higher prices, optimistic investors dominate.

question

Bubbles

answer

involve very large increases in trading volume.

question

Bubbles

answer

may continue even when many suspect a bubble. The bubble won't pop, however, until a sufficient number of skeptical investors act simultaneously. So far, no on has figured out how to predict when this is likely to occur.

question

What is a carry trade?

answer

A trading strategy that involves borrowing at a low-interest rate and investing in an asset that provides a higher rate of return.

question

Appreciation

answer

is caused from the increase in demand

question

Depreciation

answer

is caused by increase in supply (and decrease in demand)

question

Risk-averse

answer

values a lottery at less than its expected value

question

Risk-neutral

answer

values a lottery at its expected value

question

Risk-lover

answer

someone that values lotteries above expected values

question

Insurance

answer

a wealth-creating transaction that transfers risk from someone who doesn't want it ( the risk-averse consumers) to someone who is willing to accept it for a fee (the risk-neutral insurance company)

question

Lotteries

answer

(a random variable with a payment attached to each outcome) - risk-neutral values a lottery at its expected value. Risk-averse consumer values a lottery at less than its expected value.

question

Adverse selection

answer

◦ One more knowledgeable party gathers as much info about another less knowledgeable party
◦ Insurance and car companies
◦ Use screening and signaling to help combat

question

Screening

answer

describes the efforts of the less informed party (the insurance company) to gather information about the more informed party (consumers). Information may be gathered indirectly by offering consumers a menu of choices. Consumers reveal information about themselves (risk) by the choices they make.

question

Lemons problem

answer

suppose there are bad cars (lemons) worth $2,000 and good cars (cherries) worth $4,000. The information asymmetry is that each seller knows whether he or she owns a lemon, but the buyer does not.

question

Signaling

answer

describes the efforts of the more informed parties (consumers) to reveal information about themselves to the less informed party (the insurance company). A successful signal is one that bad types will not mimic. Is closely related to screening. In fact, any successful screen that separates low- from high-risk consumers, good from bad car sellers, or lazy from hardworking employees can also serve as a signal.

1 of 66

question

Economies of Scale

answer

f long-run average costs fall with output, you have increasing returns to scale of economies of scale

question

Dieconomies of Scale

answer

if long-run average costs rise with output, you have decreasing returns to scale or diseconomies of scale.

question

Constant

answer

if long-run average costs are constant with respect to output, then you have constant returns to scale.

question

Purchasing

answer

firms might be able to lower average costs by buying the inputs required for the production process in bulk or from special wholesalers

question

Managerial

answer

firms might be able to lower average costs by improving the management structure within the firm. The firm might hire better skilled or more experienced managers.

question

Diminishing returns to scale

answer

predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually results in smaller increases in output

question

Fixed costs

answer

when a business needs to purchase new capital equipment or other (fixed costs)

question

Lower levels of productivity

answer

at a certain point, hiring an additional worker can be counterproductive and lower productivity levels.

question

Limited demand

answer

question

Negative impact on working environment

answer

employing more people can disrupt others.

question

Short run

answer

...

question

What causes diminishing returns of scale?

answer

Fixed costs, lower levels of productivity, limited demand, negative impact on working environment, short run

question

Marginal productivity

answer

refers to the extra output, return, or profit yielded per unit by advantages from production inputs. Inputs can include things like labor and raw materials.

question

Marginal costs

answer

the cost added by producing one additional unit of a product or service.

question

Relationship between marginal productivity and marginal costs

answer

question

What effects marginal productivity?

answer

adding more factors/inputs such as labor and raw materials

question

Average cost

answer

calculates the effect on the total unit due to the change in output level

question

Marginal cost

answer

calculated to find out if producing one extra unit of product is profitable or not

question

Less

answer

When marginal cost is ____________ than average cost, average cost falls

question

Greater

answer

when marginal cost is ___________ than average cost, average cost rises.

question

What is the typical shape of MC?

answer

Upward-sloping

question

Economies of scope

answer

exist when average costs fall as output increase/means that production of one good reduces the cost of producing another related good.

question

Why do economies of scope occur

answer

occur when producing a wider variety of goods or services in tandem is more cost effect for a firm than producing less of a variety, or producing each good independently.

question

How are economies of scope related to mergers

answer

question

Excess demand

answer

causes the price to rise, and as price rises producers are willing to sell more, thereby increasing output

question

Excess supply

answer

causes price to fall, and as price falls producers are willing to supply less of the good, thereby decreasing output.

question

What are changes/shifts in demand?

answer

question

Change in demand

answer

refers to increase or decrease in demand of a product due to various determinants of demand, while keeping price at constant

question

Change in quantity demanded

answer

Refers to change in the quantity purchased due to increase or decrease in the price of a product

question

What are some causes of demand changes

answer

shift in income levels, consumer tastes, or a different price being charged for a related product.

question

Market prices

answer

_________ ______________convey a signal to increase or decrease quantity supplied or quantity demanded. It also provides potential business opportunities.

question

Shortage

answer

When a certain kind of product is in ______________ supply and the price rises, people will pay more attention to a produce this kind of product.

question

Prices

answer

question

What kind of markets are prices important in ?

answer

Competitive markets/Market economy

question

Controllable changes in demand

answer

price, advertising, warranties, product quality, distribution speed, service equality, and prices of substitute or complementary products also owned by the company

question

Uncontrollable changes in demand

answer

can't be controlled such as the weather, the prices of other products from competing markets, purchasing capital, and distribution of wealth.

question

Increase

answer

If both demand and supply ____________, there will be an increase in the equilibrium output, but the effect on price cannot be determined.

question

Decrease

answer

If both demand and supply ____________, there will be a decrease in equilibrium output, but the effect on price cannot be determined.

question

Market makers

answer

refers to a firm or individual who actively quotes two-sided markets in a particular security, producing bids and offers along with the market size of each. They buy low and sell high.

question

Why are market makers needed?

answer

they provide liquidity and depth to markets

question

When do market makers profit?

answer

they profit from the difference in the bid-ask spread.

question

Indifference principle

answer

if an asset is mobile, then in the long-run equilibrium, the asset will be indifferent about where it is used; that is, it will make the same profit no matter where it goes

question

How do changes in the desirability of an occupation impact its wage relative to another occupation

answer

question

Compensating wage differential

answer

once equilibrium is reached, differences in wages reflect differences in the inherent attractiveness of various professions.

question

Mobile

answer

Labor and capital are generally highly ____________ assets. They flow into an industry when profits are high and out of an industry when profits are negative.

question

long run equilibrium

answer

Once this _________ ______ _________________ is reached, capital is indifferent about where it goes because it earns the same return (its opportunity cost) regardless of the industry.

question

Mean reversion

answer

Suggests that performance eventually moves back toward the mean or average

question

Characteristics of a competitive industry

answer

question

How does the degree of competition in a market impact the demand curve

answer

The demand curve is perfectly elastic or flat

question

Can monopolies earn profits

answer

question

Bubbles

answer

increase in demand and a decrease in supply. Both changes tend to increase price. Once people form expectations about future price increases, these expectations tend to become self-fulfilling.

question

Bubbles

answer

emerge when investors disagree about the importance of big economic events. Because it is easier to place financial bets on higher prices, optimistic investors dominate.

question

Bubbles

answer

involve very large increases in trading volume.

question

Bubbles

answer

question

What is a carry trade?

answer

A trading strategy that involves borrowing at a low-interest rate and investing in an asset that provides a higher rate of return.

question

Appreciation

answer

is caused from the increase in demand

question

Depreciation

answer

is caused by increase in supply (and decrease in demand)

question

Risk-averse

answer

values a lottery at less than its expected value

question

Risk-neutral

answer

values a lottery at its expected value

question

Risk-lover

answer

someone that values lotteries above expected values

question

Insurance

answer

a wealth-creating transaction that transfers risk from someone who doesn't want it ( the risk-averse consumers) to someone who is willing to accept it for a fee (the risk-neutral insurance company)

question

Lotteries

answer

(a random variable with a payment attached to each outcome) - risk-neutral values a lottery at its expected value. Risk-averse consumer values a lottery at less than its expected value.

question

Adverse selection

answer

◦ One more knowledgeable party gathers as much info about another less knowledgeable party
◦ Insurance and car companies
◦ Use screening and signaling to help combat

question

Screening

answer

question

Lemons problem

answer

suppose there are bad cars (lemons) worth $2,000 and good cars (cherries) worth $4,000. The information asymmetry is that each seller knows whether he or she owns a lemon, but the buyer does not.

question

Signaling

answer

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Managerial Economics Exam 2

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