ECON201 - Intermediate Microeconomics & Game Theory Flashcards

Question 1

What is the definition of scarcity in economics?

Accepted Answer

Scarcity is the fundamental economic problem of having seemingly unlimited human wants and needs in a world of limited resources. It forces individuals and societies to make choices.

Question 2

Define opportunity cost.

Accepted Answer

Opportunity cost is the value of the next best alternative that was not taken when a decision was made. It represents the cost of what you give up to get something else.

Question 3

Explain a budget constraint.

Accepted Answer

A budget constraint represents all combinations of goods and services that a consumer can afford given their income and the prices of the goods. It defines the feasible consumption set.

Question 4

What is an indifference curve?

Accepted Answer

An indifference curve shows all combinations of two goods that provide a consumer with the same level of utility or satisfaction. Consumers are indifferent between any points on the same curve.

Question 5

What is the formula for the Marginal Rate of Substitution ($MRS$)?

Accepted Answer

The Marginal Rate of Substitution ($MRS$) is the rate at which a consumer is willing to give up one good (Y) to get an additional unit of another good (X) while maintaining the same level of utility. It is the absolute value of the slope of the indifference curve: $MRS_{XY} = -rac{\Delta Y}{\Delta X} = rac{MU_X}{MU_Y}$.

Question 6

How is consumer equilibrium achieved?

Accepted Answer

Consumer equilibrium occurs when the budget line is tangent to the highest attainable indifference curve. At this point, the Marginal Rate of Substitution ($MRS$) equals the price ratio of the two goods: $MRS_{XY} = rac{P_X}{P_Y}$.

Question 7

What is a production function?

Accepted Answer

A production function describes the relationship between the inputs (factors of production) used in production and the maximum output that can be produced with those inputs. It is often expressed as $Q = f(L, K)$, where $Q$ is output, $L$ is labor, and $K$ is capital.

Question 8

What is the profit-maximizing condition for any firm?

Accepted Answer

A firm maximizes profit by producing the quantity of output where Marginal Revenue ($MR$) equals Marginal Cost ($MC$). If $MR > MC$, the firm should increase output; if $MR < MC$, it should decrease output. The condition is $MR = MC$.

Question 9

Define Marginal Revenue ($MR$).

Accepted Answer

Marginal Revenue ($MR$) is the additional revenue generated from selling one more unit of a good or service. For a perfectly competitive firm, $MR = P$. For a monopolist, $MR < P$ because to sell more, the firm must lower the price for all units.

Question 10

Define Marginal Cost ($MC$).

Accepted Answer

Marginal Cost ($MC$) is the additional cost incurred from producing one more unit of a good or service. It is the change in total cost divided by the change in quantity: $MC = rac{\Delta TC}{\Delta Q}$.

Question 11

What are the key characteristics of perfect competition?

Accepted Answer

Perfect competition is characterized by many buyers and sellers, homogeneous products, free entry and exit, perfect information, and price-taking firms. Firms earn zero economic profit in the long run.

Question 12

How does a monopoly differ from perfect competition?

Accepted Answer

A monopoly is a market structure with a single seller, a unique product with no close substitutes, significant barriers to entry, and the ability to set prices (price maker). Unlike perfect competition, $MR < P$ for a monopolist, and they can earn positive economic profits in the long run.

Question 13

Explain the concept of deadweight loss in a monopoly.

Accepted Answer

Deadweight loss in a monopoly refers to the loss of economic efficiency that occurs when the equilibrium quantity of a good or service is not produced. It represents the value of potential transactions that do not occur due to the monopolist's restricted output and higher price compared to a perfectly competitive market.

Question 14

What is a Cournot duopoly model?

Accepted Answer

The Cournot duopoly model describes an oligopoly market where two firms compete by choosing the quantity of output to produce simultaneously, taking the other firm's output as given. The equilibrium is a Nash Equilibrium in quantities, where each firm's output is its best response to the other's output.

Question 15

What is a Bertrand duopoly model?

Accepted Answer

The Bertrand duopoly model describes an oligopoly market where two firms compete by choosing the price of their product simultaneously, assuming the other firm's price is fixed. With homogeneous products, the equilibrium often results in prices driven down to marginal cost, similar to perfect competition, as firms undercut each other.

Question 16

What is a Normal Form Game?

Accepted Answer

A Normal Form Game (or strategic form game) is a representation of a game in which players choose their actions simultaneously. It is typically represented by a matrix showing players, their strategies, and the payoffs for each combination of strategies.

Question 17

Define Nash Equilibrium.

Accepted Answer

A Nash Equilibrium is a set of strategies, one for each player, such that no player can improve their payoff by unilaterally changing their strategy, given the other players' strategies. It's a stable state where no player has an incentive to deviate.

Question 18

Illustrate a 2x2 normal form game and identify the Nash Equilibrium.

Accepted Answer

Consider the Prisoner's Dilemma:
```
|         | Player 2 Confess | Player 2 Don't Confess |
|---------|------------------|------------------------|
| P1 Confess | (-5, -5)         | (0, -10)               |
| P1 Don't C | (-10, 0)         | (-1, -1)               |
```
*   If P2 Confesses, P1's best response is Confess (-5 > -10).
*   If P2 Doesn't Confess, P1's best response is Confess (0 > -1).
*   If P1 Confesses, P2's best response is Confess (-5 > -10).
*   If P1 Doesn't Confess, P2's best response is Confess (0 > -1).
The Nash Equilibrium is (Confess, Confess) with payoffs (-5, -5), as it is the dominant strategy for both players.

Question 19

Define Pareto Efficiency.

Accepted Answer

A situation is Pareto efficient if it is impossible to make one person better off without making anyone else worse off. In a game matrix, a Pareto efficient outcome is one where there is no other outcome that makes at least one player better off and no player worse off.

Question 20

Identify Pareto efficient outcomes in the Prisoner's Dilemma matrix.

Accepted Answer

Using the Prisoner's Dilemma matrix from the previous card:
```
|         | Player 2 Confess | Player 2 Don't Confess |
|---------|------------------|------------------------|
| P1 Confess | (-5, -5)         | (0, -10)               |
| P1 Don't C | (-10, 0)         | (-1, -1)               |
```
*   (-5, -5): Not Pareto efficient, as (-1, -1) makes both players better off.
*   (0, -10): Pareto efficient. To make P2 better off, P1 must be worse off.
*   (-10, 0): Pareto efficient. To make P1 better off, P2 must be worse off.
*   (-1, -1): Pareto efficient. To make either player better off, the other must be worse off.

Therefore, the Pareto efficient outcomes are (0, -10), (-10, 0), and (-1, -1). Note that the Nash Equilibrium (-5, -5) is not Pareto efficient in this game.

Question 21

What is the difference between short-run and long-run in production?

Accepted Answer

In the short run, at least one factor of production (typically capital) is fixed, while others (like labor) are variable. In the long run, all factors of production are variable, allowing firms to adjust their scale of operations fully.

Question 22

Define economies of scale.

Accepted Answer

Economies of scale occur when the average cost per unit of output decreases as the total quantity of output increases. This often happens due to specialization, bulk purchasing, more efficient use of technology, or improved management.

Question 23

What is monopolistic competition?

Accepted Answer

Monopolistic competition is a market structure characterized by many firms, differentiated products (e.g., branding, quality, features), and relatively free entry and exit. Firms have some market power due to product differentiation but face competition from close substitutes.

Question 24

Explain the concept of a dominant strategy.

Accepted Answer

A dominant strategy is a strategy that yields the highest payoff for a player regardless of what the other player(s) choose. If a player has a dominant strategy, they will always choose it, making their decision independent of others' actions.

ECON201 - Intermediate Microeconomics & Game Theory

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