Essential Economic Principles Defined
Political Logrolling Defined
The process where political representatives trade votes or support to gain a majority, often when deciding whether to act, is called: Logrolling.
Normal Goods and Income Elasticity
Regarding a normal good, which has positive income elasticity (demand increases with income): The statement “price is always decreasing demand” is not the definition of a normal good.
Bertrand Model Behavior
What is the pattern of behavior in each iteration in the Bertrand model?: Set a lower price than rival.
Utility Function for Substitutes
A utility function U = 2X1 + X2 represents: Perfect substitutes.
Law of Diminishing Returns Optimum
In the context of the Law of Diminishing Returns: The technical optimum coincides with the maximum average product and where marginal product equals average product.
Price Elasticity of Supply
The elasticity of supply with respect to price, “ceteris paribus”, will be between 0 and +∞ if the supply function is linear with a positive slope.
Average vs Marginal Costs
When average total costs are below marginal costs: An increase in output will increase average total costs.
Demand Homogeneity Degree Zero
The fact that demand functions are homogeneous of degree zero in prices and income implies: That proportional changes in prices and income do not change the consumer’s demand.
Industry Demand in Perfect Competition
The demand curve facing the industry in perfect competition is: Descending.
Backward-Bending Labor Supply
The backward-bending labor supply curve implies: That from a certain wage level, a further increase in wages leads to a decrease in labor supply.
Firm Price Determination
How a firm relates to price: The price is determined by the market, and the firm decides how much to produce at that price.
Monopoly Short-Term Equilibrium
In a pure monopoly market structure, the short-term equilibrium condition is: Marginal Revenue (MR) = Marginal Cost (MC). (Note: The formula provided in the original text is unclear.)
Bilateral Monopoly Equilibrium
The equilibrium solution in bilateral monopoly: It is indeterminate between the theoretical outcomes of pure monopoly and pure monopsony.
Cobweb Market Model
In a Cobweb market model: The supply price is based on the previous period’s price (a lag).
Contestable Market Definition
In a contestable market: Free entry and exit mean that firms incur no sunk costs (or that sunk costs are fully recoverable).
Factors Not Affecting Labor Supply
One of the following factors DOES NOT DIRECTLY AFFECT the labor supply curve: Not affected: The employment level.
Factors that do affect it:
- Preferences for leisure
- The age structure of the population
- Minimum wage legislation
Stigler’s Barrier to Entry
George Stigler’s definition of a barrier to entry concerns: Advantages of incumbent firms compared with potential entrants.
Incorrect Barrier to Entry Concept
One of the following concepts regarding barriers to entry IS WRONG: (Wrong: the disadvantage of the first mover – existing firms can position themselves in the market before others enter).
Correct concepts include:
- Commitment as a threat (e.g., publicly stating price reduction upon entry)
- Mechanisms ensuring a credible aggressive response to entry
- Sunk costs
Behavioral Theory of the Firm
The behavioral theory of the firm was developed by: Richard Cyert and James March. (Note: Among the options provided – Andrews, Williamson, Berle and Means – none are the primary developers of this specific theory.)
Median Voter Theorem
The Median Voter Theorem states: In a majority-rule voting system, the outcome will be the policy preferred by the median voter.
Marginal Rate of Technical Substitution
The Marginal Rate of Technical Substitution (MRTS) can be defined as: The rate at which one input can be substituted for another while keeping output constant, equal to the ratio of the marginal products of the inputs.
Firm Expansion Path
The expansion path of a firm shows: The optimal combination of inputs at various levels of output.
Marginal Cost Relationship
Marginal costs: Intersect average variable costs and average total costs at their respective minimum points.
Long-Run Average Cost Curve
The Long-Run Average Cost (LRAC) curve: It is typically U-shaped, reflecting economies and diseconomies of scale. (Note: The original statement seems to confuse long-run concepts or refers to diseconomies of scale.)
Galbraith’s Countervailing Power
John Kenneth Galbraith’s concept of countervailing power: The emergence of opposing power blocs (like labor unions or large retailers) to offset the power of large firms (like manufacturers).
Ability to Pay Taxation Principle
Regarding the Ability to Pay principle of taxation and concepts like equal sacrifice:
FALSE statement: The principle does not imply anything about tax progressivity or regressivity; it only depends on utility functions. (Note: The principle, especially with diminishing marginal utility, implies progressivity.)
TRUE statements:
- Wealthy individuals would pay a much higher amount of tax than poor individuals (under a progressive system).
- The real problem is that utility is neither observable nor measurable, making practical application difficult for tax authorities.