ECON101 Lecture 18: lecture 16

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carmineplatypus987

7 Nov 2018

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Nafeez Fatima

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ECON101 Lecture Notes - Lecture 17: Opportunity Cost, Economic Efficiency, Physical Capital

ECON101 Lecture 18: lecture 16

ECON101 Lecture 19: lecture 19

8. What is the difference between a command system and an incentive system?

▪ Characteristics of a command and an incentive system (textbook, not gone over in class)

9. What is the principal – agent problem? How do firms cope with this problem?

o Two groups: principal, agent

o Devise appropriate compensation rules that make an agent work in the pbest

interest of the principal

o Three strategies to deal with principal agent problem:

1. Ownership

2. Incentive pay

3. Long term contracts

10. What are the three types of firms? Explain the major advantages and disadvantages of

each.

o the three types of business organizations:

1. sole proprietorship

- single owner of firm

- unlimited liability

- taxed once according to owner’s income

2. partnership

- jointly owned by 2 or more people

- profit is divided between individuals

- unlimited liability

- taxed once according to personal income

3. corporation

- shareholders that have stock in the firm own the firm

- limited liability

- taxed twice, once as corporate profit and then as shareholder’s income

11. What are the four market types? Explain the distinguishing characteristics of each.

Economists will identify 4 types of market:

1. perfect competition (extreme, fierce competition)

o many buyers

o many sellers

o all firms are selling one homogenous product

o input market and output market

o negligible transaction costs

o (fierce competition, extreme form of competition)

o Easy entry into market

o Firms are not interdependent

o [looked at as benchmark, and how the other markets are deviating from it]

2. monopolistic competition

o when it comes to product, it’s not homogenous or identical, it’s slightly different

(product differentiation)

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Document Summary

Explain the major advantages and disadvantages of each: the three types of business organizations, sole proprietorship single owner of firm. Unlimited liability taxed once a(cid:272)(cid:272)o(cid:396)di(cid:374)g to o(cid:449)(cid:374)e(cid:396)"s i(cid:374)(cid:272)o(cid:373)e: partnership jointly owned by 2 or more people. B/c it takes less time to know about a firm, easier to reach out: economies of scale. Funds can achieve both economics of scale and economies of scope. Sometimes its better for firms to produce more than one commodity. Sometimes a firm can produce two outputs with lower costs. Related to the fact that firms can make costs cheaper by producing two commodities: team production. Long run production decision: sunk cost and sunk cost fallacy, short run output decision. Diminishing marginal returns: short run cost functions. Total cost (tc): total fixed costs (tfc, total variable costs (tvc) Average cost: average fixed cost (afc, average variable cost (avc, long run cost functions.

Related Questions

Question 1

Which compensation method helps to explain the large difference between the salaries of top-level managers and mid-level managers in a firm?

	A.	Tournaments
	B.	New blood
	C.	Piece rate
	D.	Backloaded compensation

3 points

Question 2

Please consider the information provided under Question 19 in Chapter 3 (page 54). Based on the stated information, the optimal number of bees kept if the externality is ignored by Yung is 5,000. Is the socially optimal number of bees higher or lower than 5,000?

	A.	We do not have enough information to answer this question
	B.	Same
	C.	Lower
	D.	Higher

3 points

Question 3

Which of the following factors contribute to the existence of firms?

	A.	All of these factors contribute to firm existence
	B.	Risks associated with specialization
	C.	Incomplete contracts
	D.	Willingness of some people to take on risk in exchange for residual income

3 points

Question 4

Public goods are often subject to free-rider problems because these goods are:

	A.	Non-rival and non-excludable
	B.	Rival and non-excludable
	C.	Non-rival and excludable
	D.	Rival and excludable

3 points

Question 5

Which of the following is the most efficient mechanism for allocating scarce goods?

	A.	Government allocation system
	B.	First-come-first-served system
	C.	Market system
	D.	Random allocation system

3 points

Question 6

Many years ago, most of the major Hollywood movie studios also owned chains of local movie theaters across the US. Today, most of the local movie theaters are owned by other companies. What has happened to the degree of integration in the movie industry over time?

	A.	Less horizontally integrated
	B.	Less vertically integrated
	C.	More horizontally integrated
	D.	More vertically integrated

3 points

Question 7

Your firm produces replacement parts for the nuclear submarines operated by the US Navy. Which one of Porter's Five Forces will be most prominent in determining your strategies and profitability?

	A.	Bargaining Power of Suppliers
	B.	Bargaining Power of Customers
	C.	Threat of New Entrants
	D.	Threat of Substitutes

3 points

Question 8

Which of the following statements is NOT true?

	A.	The market mechanism for allocating resources is most efficient due to the incentives it creates.
	B.	Markets are always the most efficient way to allocate goods, even if the market is not perfectly competitive.
	C.	The random allocation mechanism provides no incentives at all.
	D.	The government allocation mechanism provides no incentive for the economy to grow.

3 points

Question 9

Suppose a firm's cost structure exhibits economies of scope. Which of the following actions is compatible with this cost structure?

Diversify into other product lines

Focus on core competencies and reduce production

Focus on core competencies and maintain constant production

Focus on core competencies and expand production

Question 10

Please refer to Table 8.3 on page 132 in the book. Suppose we change the payoffs in the "low price, low price" cell to 0, 25 from 0, 0. Does this change the Nash equilibrium for the game, and is the game still a Prisoner's Dilemma?

	A.	Equilibrium changes, still a Prisoner's Dilemma
	B.	Equilibrium changes, no longer a Prisoner's Dilemma
	C.	Same equilibrium, no longer a Prisoner's Dilemma
	D.	Same equilibrium, still a Prisoner's Dilemma

3 points

Question 11

Which of the following statements about restricting entry to markets is NOT true?

	A.	Brand identity and logos are expensive to establish, and entrants may find it very expensive to establish comparable position in the market.
	B.	Predatory pricing is illegal but very difficult to prove in court
	C.	Branded products tend to have more elastic demand, which makes it more difficult for entrants to charge high prices and they must stay out of the market.
	D.	A low-quality seller cannot effectively use a warranty program to keep other firms out of its market

3 points

Question 12

Your firm earns $2 million per quarter in total revenue, and your accounting profits are $100,000 per quarter. You do not charge the firm for the use of an old building that you own because it is 50 years old and fully depreciated. However, another firm has offered you $200,000 per quarter to use the facility, and this is the market rental rate for similar facilities. In this case, we know that your:

	A.	Opportunity costs are positive and economic profits are negative
	B.	Opportunity costs and economic profits are positive
	C.	Opportunity costs are negative and economic profits are positive
	D.	Opportunity costs and economic profits are negative

3 points

Question 13

Please refer to Question 13 in Chapter 1 (page 17). What is the marginal cost of reducing global warming by 0.017 degrees?

	A.	MC = 60
	B.	MC = 5
	C.	We do not have enough information to answer this question
	D.	MC = 50

3 points

Question 14

In Chapter 6, Boyes focuses on negative externalities such as the various types of pollution. However, as we discussed during our online session, we can also observe positive externalities in which external benefits are generated for people. Which of the following is NOT an example of a positive externality?

	A.	Workers can help one another to "cover the phones" and make sure that someone is always available to help clients
	B.	Workers can provide ideas to one another about how to solve problems
	C.	All of these cases are examples of positive externalities
	D.	Workers can form carpools and use other means to reduce commuting costs

3 points

Question 15

Common property resources are:

	A.	Non-rival and non-excludable
	B.	Non-rival and excludable
	C.	Rival and non-excludable
	D.	Rival and excludable

3 points

Question 16

The free-rider problem arises in markets for common property resources.

	A.	False
	B.	True

3 points

Question 17

Firms that set their product price below the actual cost of production may be engaging in:

	A.	Predatory pricing
	B.	Monopoly pricing
	C.	Moral hazard
	D.	Dollar-cost averaging

3 points

Question 18

Under a cap-and-trade mechanism to control air pollution, what happens to the price of pollution rights if the supply of righs is reduced (i.e., the supply of rights is reduced)?

Increases

Decreases

No change

Question 19

The key method for a manufacturing firm to avoid hold-up problems is to have another source of inputs.

	A.	False
	B.	True

3 points

Question 20

Your firm sells luxury autos, and you have asked the marketing department to develop and stronger brand identity through a new ad campaign. After the campaign has run for 6 months, you hire an economic consultant to study the impact of the campaign on the demand for your autos. The consultant reports that the demand for your cars is now more elastic than it was 6 months ago. Was the new ad campaign successful?

	A.	Yes
	B.	No

ECON101 Lecture 18: lecture 16

ECON101 Lecture Notes - Lecture 17: Opportunity Cost, Economic Efficiency, Physical Capital

ECON101 Lecture 18: lecture 16

ECON101 Lecture 19: lecture 19

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