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What is the change in total cost equal to in the marginal cost equation? Marginal cost multiplied by change in quantity. Fixed costs equal: Total ... [Show More] costs minus variable costs Economic profit is distinct from accounting profit because Economic profit incorporates both explicit and implicit costs. Total costs include: Variable costs plus fixed costs Marginal costs consider The increase in total cost arising from an extra unit of production. What response best describes the relationship between marginal costs and total costs? Whenever marginal cost is less than average total cost, average total cost is falling. Which statement is true about productivity? The value of marginal product of labor equals wage in a competitive firm. A production function expresses the relationship between: Quantity of resource inputs and product/service outputs. Opportunity costs include: The income the entrepreneur could have earned working for an employer. Economists and decision makers study and then make decisions or judgments based on (select best answer): Marginal analysis. The primary reason that the marginal cost curve declines and then increases is: Firms experience increasing marginal product, then diminishing marginal product. When do marginal costs eventually rise? With the quantity of output. Consider the following example: A perfectly competitive firm finds that at current production levels marginal cost is greater than marginal revenue. What action should this firm take in order to pursue the maximization of profit? Decrease the target output. A competitive firm is characterized by: Trading of identical products. Competitive firms experience marginal revenue that is: Equal to price. In the short-run, a competitive firm would continue to produce under the following circumstance: Total revenue exceeds total variable costs. What fundamental shape does a demand curve take in a competitive market? Horizontal. For a perfectly competitive firm which condition is true? The demand curve is the same as the marginal revenue curve. Which condition is true for perfectly competitive firms in the long-run? They will exit the market if total revenue is less than total costs. Which statement is true concerning marginal costs? Marginal costs typically decline and then increase with the quantity of output. What rule is used by perfectly competitive firms to determine shut-down in the short-run? Price is less than average variable costs What is true of perfectly competitive firms in the long-run? Economic profits will not be achievable. What two market structures have common profit characteristics in the long run? Perfect competition and monopolistic competition. Consider the structure/shape of the demand curve for the various firm types. In what way does a monopoly's demand curve differ from a perfectly competitive firm's demand curve? The monopoly's demand curve is downward sloping and the competitive firm's demand curve is horizontal. Monopolistic firms seek to maximize profit. What condition allows them to achieve this goal? When marginal revenue equals marginal cost. In pursuing the maximization of profit, monopolies set price at a point that is: Above marginal cost. Consider demand for the various firm types. How does a monopoly's demand curve compare to the demand curve for a perfectly competitive firm? It is less elastic. A monopoly's demand curve is: The same as the market demand curve. What is a key characteristic of the demand curve for a monopoly? It is the same as the market demand curve. In the long-run, how do monopolistically competitive firms garner economic profits? They earn zero economic profits in the long-run. What is true of a monopolistically competitive firm's demand curve? It is less elastic than a perfectly competitive firm. What characteristic does a monopolistically competitive firm have in common with a perfectly competitive firm? Cannot earn economic profits in the long-run. What is the primary goal of a firm in monopolistic competition? Profit maximization. Consider the choice that an oligopolistic firm has to either compete or to cooperate, collude and form a cartel with the only other existing firm in the market. What do game theory and the prisoner's dilemma teach regarding this firm's choice? It is difficult to maintain cooperation. Consider the prisoner's dilemma example. In what way are an oligopoly and the prisoner's dilemma similar in nature? Both depict the difficulty of maintaining cooperative agreements. Why is studying the prisoner's dilemma applicable to business? It demonstrates the value of mapping out a potential strategy given the actions of rivals. Think of the way in which the prisoner's dilemma is resolved. In what way does self-interest influence each prisoner's decision in the prisoner's dilemma? Both prisoners will likely confess. How do self-interest and rivalry in an oligopoly affect each firm's market decisions? Collusion will fail and self-interest will prevail in the long-run. In the prisoner's dilemma, what is the likely outcome? Both prisoners will confess. What can we learn from game theory and the prisoner's dilemma about oligopolies? Strategy is affected by rivalries. Consider a situation in which the Federal Reserve decides to increase the reserve requirement. What impact will this change have on the nominal interest rate and the quantity of money? The interest rate increases, and the quantity of money decreases. The Federal Reserve can increase the money supply by purchasing bonds from the public. This type of market operation is called: Open market operation. Banks often borrow money from the Federal Reserve and are then required to repay the money with interest. What is the interest rate on this type of loan called? Discount rate. The reserve ratio is currently 10 percent and the Federal Reserve is planning to change the reserve ratio to 20 percent. What will be the impacts on interest rates and the quantity of money? The interest rate increases and the quantity of money decreases. When banks borrow directly from the Federal Reserve, the interest rate is known as: The Discount rate. What is the method that the Federal Reserve prefers to use to expand or contract the money supply? Open market operations. Consider the impact of fiscal policy. In order to achieve a rightward shift of the aggregate demand curve, fiscal policy would need to consider: Expanding government purchases. If the Federal Reserve uses monetary policy to increase the money supply, what impact will this have on aggregate demand and interest rates? Aggregate demand will increase, interest rates will decrease. Which of the following is a Federal Reserve monetary policy that shifts the aggregate demand curve to the left? Increasing the reserve requirement. What is the most effective fiscal method to stimulate aggregate demand by raising consumer spending? A permanent tax cut. What term most fully describes decreasing aggregate demand and increasing prices? Stagflation. What is likely to happen to interest rates if the government runs protracted large budget deficits? Interest rates rise. The law of demand states that, all else equal: price and quantity demanded are inversely related. If the equilibrium wage for fast food workers in a local community is $8.00 per hour and the local government imposes a price floor for wages of $15.00 per hour, what will be the market impact(s)? A surplus of fast food labor. Which of the following factors influences the price elasticity of demand? Availability of close substitutes. What measures how the quantity demanded of one good responds to a change in price of another good? Cross-price elasticity of demand. What measures how much the quantity supplied responds to change in price? Price elasticity of supply. Bob's income increases by 20% in a given year. Following Bob's change in income, he adjusts which products he purchases from the store. If Bob purchases less microwave pizza, this indicates that for Bob this product is: An inferior good. Bob travels to the store to purchase steak for a weekend party. Upon arriving, Bob notices that the price of steak has doubled since his last visit. Bob decides to purchase chicken instead of steak. In relation to his decision to not purchase steak, Bob also opts to not purchase the best tasting steak sauce in the world (A-1). Bob's decision not to purchase A-1 Steak Sauce indicates that this sauce is: A complement to steak. If packaged hamburger has a price elasticity of demand of 2.35, then what will be the impact on total revenue at the local grocery store if the store decides to cut the price of packaged hamburger as a six month marketing promotion? Total revenue will increase. You are trying to determine whether a price decrease by a competitor will affect the sales of your product. Which of the following can help answer this question? Price elasticity of demand. You are attempting to determine if your product is a normal or inferior good. What is the best calculation you can use to answer this question? Income elasticity of demand. You are a buyer for a local department store that sells donuts every morning to commuting customers. There have been many complaints of stock outs of donuts by customers. You know that there are many bakers in town and you are trying to figure out what price you will need to pay to encourage these bakers to provide more donuts to your department store every morning. Which tool can best help you in your analysis? Price elasticity of supply. If demand is elastic, what will happen to total revenue if the firm lowers its price? Total revenue will increase. We would expect the cross-price elasticity of demand between hamburgers and hot dogs to be: positive, meaning they are substitute goods. We would expect the cross-price elasticity of demand between computers and software to be: negative, meaning they are complementary goods. The opportunity cost of one good relative to another reflects: The slope of the budget constraint. Assume that an individual's budget decreases and that prices remain constant. What would happen to his/her budget constraint? The budget constraint line would: Shift inward in a parallel manner. Observing an individual's indifference curve demonstrates his/her: Preferences. Assume that Bob's income increases following a promotion at work, but prices do not change. What will happen to Bob's budget constraint? It will shift outward, parallel to its initial position. How will an increase in income affect the budget constraint, assuming that prices remain the same? Shift outward. What is a good called that consumers buy less of when their income increases? Inferior good. What is true of indifference curves? The consumer's preferences are represented with indifference curves. [Show Less]
The resource-based view of global business differs from the institution-based view of global business in that the resource-based view _____. focuses on th... [Show More] e internal strengths on the firm The _____ of globalization suggests that globalization is neither recent nor one-directional. pendulum view Globalization can be viewed as: ALL OF THESE ANSWERS - a new force sweeping through the world in recent times; a long-run historical evolution since the dawn of human history; a pendulum that swings from one extreme to another from time to time. According to the theory of absolute advantage, under free trade, Each nation gains by specializing in economic activities in which a nation has absolute advantage. Chile requires 50 units of resource to produce one ton of wine and 20 units of resource to produce one ton of blueberries. France requires 30 units of resource to produce one ton of wine and 40 units of resource to produce one ton of blueberries. Which of the following is true? France has a comparative advantage in wine. Free trade is defined as: The idea that market forces should determine how much to trade with little or no government intervention. Which of the following is NOT a nontariff trade barrier (NTB)? Cultural distance Protectionism is similar to mercantilism as they both advocated _____. government involvement in international trade The _____ principle advocated that governments should actively protect domestic industries from imports and vigorously promote exports. protectionism The _____ theory is based on the assumption that the wealth of the world is fixed. mercantilism OLI advantages refer to a firm's quest for _____via FDI. ownership advantages, location advantages, and internalization advantages Firms prefer FDI to licensing because FDI_____. provides the firm with direct ownership to its foreign assets Which of the following is a benefit of FDI to home countries? Learning from operations Which of the following foreign exchange transactions provide protection to traders and investors from being exposed to fluctuations of the spot rate? Forward transactions Foreign exchange rates are influenced by: ALL OF THESE - interest rates and money supply; relative price differences and purchasing power parity; supply and demand of the currencies. If an IMF member country were to find itself in a severe balance of payments crisis that threatened its financial stability, the IMF would most likely: give the country a loan but require the country to make long-term policy reforms. A home appliance manufacturer located in The Netherlands decides to open two new manufacturing plants, one in Poland and the other in Thailand. Its purpose is to offset currency losses through: strategic hedging. Risk analysis of any country must include an analysis of the country's: currency risks. Which of the following is an equity mode of entry? Wholly owned subsidiaries Which of the following is a disadvantage of licensing and franchising? Little control over marketing The following are examples of location-specific advantages: All OF THESE - industry demand that creates a skilled labor force; industry demand that facilitates a pool of specialized suppliers and buyers; knowledge spillovers among closely located firms. Assume that a firm is looking to expand into a foreign market, but it needs an opportunity that has low development costs and little risk. Its best choice would be: a contractual agreement. With regard to foreign market entry, the resource-based view argues that foreign firms need to deploy overwhelming resources and capabilities to offset their liability of foreignness. Which of the following sets of words describes the initial set of actions a firm uses to gain competitive advantage and the other firm's response to it? Attack, counterattack Which of the following is NOT a method used by competitors to signal their intention to reduce competitive intensity to other competitors? Developing new markets where there is less competition The price leader's _____ is defined as sufficient resources possessed to deter and combat defection. capacity to punish If marginal cost is rising, marginal product must be falling. When marginal cost is less than average total cost, average total cost is falling. The most likely explanation for economies of scale is specialization of labor. If a firm uses labor to produce output, the firm's production function depicts the relationship between the number of workers and the quantity of output. Which of the following represents the firm's short-run condition for shutting down? Shut down if TR < VC If there is an increase in market demand in a perfectly competitive market, then in the short run profits will rise. A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. When firms are said to be price takers, it implies that if a firm raises its price, buyers will go elsewhere. If a firm in a perfectly competitive market triples the quantity of output sold, then total revenue will exactly triple. Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue does not change. Farmer McDonald sells wheat to a broker in Kansas City, Missouri. Because the market for wheat is generally considered to be competitive, Mr. McDonald maximizes his profit by choosing the quantity at which market price is equal to Mr. McDonald's marginal cost of production. Which of the following statements is true? When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. The deadweight loss associated with a monopoly occurs because the monopolist produces an output level less than the socially optimal level. Price discrimination is the business practice of selling the same good at different prices to different customers. Price discrimination is a rational strategy for a profit-maximizing monopolist when there is no opportunity for arbitrage across market segments. A monopoly can earn positive profits because it can maintain a price such that total revenues will exceed total costs. A natural monopoly occurs when there are economies of scale over the relevant range of output. The profit-maximization problem for a monopolist differs from that of a competitive firm in which of the following ways? A competitive firm maximizes profit at the point where average revenue equals marginal cost; a monopolist maximizes profit at the point where average revenue exceeds marginal cost. The two types of imperfectly competitive markets are monopolistic competition and oligopoly. A market structure with only a few sellers, each offering similar or identical products, is known as oligopoly. Which of the following statements is correct? Monopolistic competition is similar to perfect competition because both market structures are characterized by perfectly elastic demand curves facing each firm. A similarity between monopoly and monopolistic competition is that in both market structures sellers are price makers rather than price takers. Which of the following conditions is characteristic of a monopolistically competitive firm in both the short run and the long run? P > MC Which of the following statements is correct? If duopolists successfully collude, then their combined output will be equal to the output that would be observed if the market were a monopoly. In the prisoners' dilemma game, self-interest leads each prisoner to confess. Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and finds a small bag of marijuana and arrests the two. During the interrogation, each is separately offered the following: "If you confess to dealing drugs and testify against your partner, you will be given immunity and released while your partner will get 10 years in prison. If you both confess, you will each get 5 years." If neither confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of marijuana. If each suspected drug dealer follows a dominant strategy, what should he/she do? Confess regardless of the partner's decision The limit on the consumption bundles that a consumer can afford is known as the budget constraint. The slope at any point on an indifference curve is known as the marginal rate of substitution. Which of the following statements is not true with regard to the standard properties of indifference curves? Indifference curves are bowed outward. The consumer's optimal purchase of any two goods is the point where the consumer reaches the highest indifference curve subject to remaining on the budget constraint. Equilibrium quantity must decrease when demand decreases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease. If the demand for a product increases, then we would expect equilibrium price and equilibrium quantity both to increase. Suppose that demand for a good increases and, at the same time, supply of the good decreases. What would happen in the market for the good? Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous. Cross-price elasticity of demand measures how the quantity demanded of one good changes in response to a change in the price of another good. The price elasticity of supply measures how much the quantity supplied responds to changes in the price of the good. The price elasticity of demand measures buyers' responsiveness to a change in the price of a good. Which of the following is not a determinant of the price elasticity of demand for a good? The steepness or flatness of the supply curve for the good If the price of walnuts rises, many people would switch from consuming walnuts to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of the availability of close substitutes in determining the price elasticity of demand. When the Fed decreases the discount rate, banks will borrow more from the Fed and lend more to the public. The money supply increases. Other things the same, if reserve requirements are increased, the reserve ratio increases, the money multiplier decreases, and the money supply decreases. Which of the following policies can the Fed follow to increase the money supply? Reduce the interest rate on reserves Which of the following is NOT an example of monetary policy? The Federal Reserve facilitates bank transactions by clearing checks. When conducting an open-market sale, the Fed sells government bonds, and in so doing decreases the money supply. Which of the following increase when the Fed makes open market purchases? Currency and reserves The federal funds rate is the interest rate at which banks lend reserves to each other overnight. If the Fed raised the reserve requirement, the demand for reserves would increase, so the federal funds rate would rise. The Federal Reserve is the central bank of the United States. International Monetary Fund The IMF's mission is to promote global economic growth and financial stability, encourage international trade, and reduce poverty around the world. The IMF was originally created in 1945 as part of the Bretton Woods agreement, which attempted to encourage international financial cooperation by introducing a system of convertible currencies at fixed exchange rates. The International Monetary Fund (IMF) is based in Washington, D.C. The organization is currently composed of 189 member countries, each of which has representation on the IMF's executive board in proportion to its financial importance. The main supportive pillars of the informal institutions are _____. normative and cognitive The _____ refers to the coercive power of governments. regulatory pillar In which of the following examples can the role of the cognitive pillar be identified? A firm being exposed after one of its employees turned whistleblower A fundamental aspect of _____ is that it effectively conducts global business by providing an individual the right to freedom of expression and organization. democracy Which of the following is true of the common law system? It has spread to all English-speaking countries and their (former) colonies. _____ refers to a legal system based on religious teachings. Theocratic law The TRIPS system was designed to _____. force firms to innovate while strictly adhering to IPR guidelines Which of the following is true of a pure market economy? All factors of production are privately owned. Which of the following is true of a command economy? It does not allow private entrepreneurship. For which of the following types of economies would the factors of production depend on the relative distribution of market forces versus command forces? Mixed economy Which of the following is true of private ownership? It tends to force firms into liquidation due to high competition. Which of the following is NOT a proposition of the institution-based view of global business? Informal institutions do not govern firm behavior. Democracy is: A political system in which citizens elect representatives to govern the country. Which of the following statement is NOT true about market economy? All factors of production should be government owned and controlled. What are the two core propositions behind the institution-based view of global business? Managers and firms pursue their interests and make choices rationally in situations; and where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty and providing constancy to managers and firms. Which economic system is the most common? A mixed economy On a graph, consumer surplus is represented by the area below the demand curve and above price. A drought in California destroys many red grapes causing the prices of both red grapes and red wine to rise . As a result, the consumer surplus in the market for red grapes decreases, and the consumer surplus in the market for red wine decreases. If a consumer places a value of $15 on a particular good and if the price of the good is $17, then the consumer does not purchase the good. Henry is willing to pay 45 cents, and Janine is willing to pay 55 cents, for 1 pound of bananas. When the price of bananas falls from 50 cents a pound to 40 cents a pound, both Janine and Henry experience an increase in consumer surplus. Import quotas and tariffs produce some common results. Which of the following is not one of those common results? Equal revenue is always raised for the domestic government. If the United States threatens to impose a tariff on Colombian coffee if Colombia does not remove agricultural subsidies, the United States will be worse off if Colombia doesn't remove the subsidies in response to the threat. What is the fundamental basis for trade among nations? Comparative advantage A tax on an imported good is called a a tariff. In a simple circular-flow diagram, total income and total expenditure are always equal because every transaction has a buyer and a seller. GDP is defined as the value of all final goods and services produced within a country in a given period of time. Which of the following is included in GDP? Both the market value of rental housing services and the market value of owner-occupied housing services A farmer produces oranges and sells them to Fresh Juice, which makes orange juice. The oranges produced by the farmer are called intermediate goods. For the purpose of calculating GDP, investment is spending on capital equipment, inventories, and structures, including household purchases of new housing. The value of goods added to a firm's inventory in a certain year is treated as investment, since GDP aims to measure the value of the economy's production that year. Which of the following is true of the civil law system? It is the most widely distributed legal system around the world. _____ is a long-standing legal doctrine that excuses firms from living up to the terms of a deal in the event of natural disasters or other calamities. Force majeure Which of the following would be an example of a force majeure defense for a seller? If the goods to be delivered are destroyed in an earthquake [Show Less]
Four properties of an indifference curve
(1) Higher indifference curves are preferred to lower ones. People usually prefer to consume more goods rather th... [Show More] an less.
(2) Indifference curves are downward sloping. The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for the other.
(3) Indifference curves do not cross.
(4) Indifference curves are bowed inward. The slope of an indifference curve is the marginal rate of substitution—the rate at which the consumer is willing to trade off one good for the other.
Marginal rate of substitution.
The rate at which the consumer is willing to trade off one good for the other (i.e. how much Pepsi the consumer requires to be compensated for a one-unit reduction in pizza consumption)
Budget constraint
The consumption bundles that the consumer can afford.
How might a budget constraint be impacted by an increase in income?
Additional bundles could be consumed with an increase in income.
Graphical elements needed to determine a consumer's optimal point of consumption
Indifference curve and budget constraint.
How is a consumer's optimal point of consumption determined precisely? What is the condition that must be met?
The point at which this indifference curve and the budget constraint touch (the best combination of pizza and Pepsi available to the consumer.) The marginal rate of substitution equals the relative price of the two goods.
Marginal cost
The increase in total cost that arises from an extra unit of production
How is marginal cost related to total cost?
The portion of total cost resulting from an extra unit of production.
Formula to calculate marginal cost
Change in total cost divided by change in quantity
If Dave's company has a total cost of $100 when quantity output is 5, and a total cost of $115 when quantity output is 6, what is the marginal cost of producing the 6th unit?
$15
Total cost is made of two types of costs, what are they?
Fixed and Variable.
How does a firm determine to shut down in the short-run? What rule characterizes this?
If the revenue that it would earn from producing is less than its variable costs of production. P
Suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer surplus in the television market ma... [Show More] y increase, decrease, or remain unchanged. Which of the following is true when the price of a good or service rises? Some buyers exit the market Cost is a measure of the seller's willingness to sell. The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate decreases, and producer surplus decreases. The distinction between efficiency and equality can be described as follows: Efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society. Tomato sauce and spaghetti noodles are complementary goods. A decrease in the price of tomatoes will increase consumer surplus in the market for tomato sauce and increase producer surplus in the market for spaghetti noodles. The distinction between efficiency and equality can be described as follows: Efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society. A demand curve reflects each of the following except the quantity that each buyer will ultimately purchase. A drought in California destroys many red grapes causing the prices of both red grapes and red wine to rise . As a result, the consumer surplus in the market for red grapes decreases, and the consumer surplus in the market for red wine decreases. Dawn's bridal boutique is having a sale on evening dresses. The increase in consumer surplus comes from the benefit of the lower prices to both existing customers who now get lower prices on the gowns they were already planning to purchase and new customers who enter the market because of the lower prices. Suppose the market demand curve for a good passes through the point (quantity demanded = 100, price = $25). If there are five buyers in the market, then the marginal buyer's willingness to pay for the 100th unit of the good is $25 When a country that imports a particular good imposes a tariff on that good, consumer surplus decreases and total surplus decreases in the market for that good. Import quotas and tariffs produce some common results. Which of the following is not one of those common results? Equal revenue is always raised for the domestic government The world price of a ton of steel is $1,000. Before Russia allowed trade in steel, the price of a ton of steel there was $650. Once Russia allowed trade in steel with other countries, Russia began exporting steel and the price per ton in Russia increased to $1,000 Representative Vazquez cites the "jobs argument" when he argues before Congress in favor of restrictions on trade; he argues that everything can be produced at lower cost in other countries. The likely flaw in Representative Vazquez's reasoning is that he ignores the fact that the gains from trade are based on comparative advantage If the Korean steel industry subsidizes the steel that it sells to the United States, the harm done to U.S. steel producers is less than the benefit that accrues to U.S. consumers of steel. The problem with the protection-as-a-bargaining-chip argument for trade restrictions is if it fails, the country faces a choice between two bad options Assume, for Vietnam, that the domestic price of textiles without international trade is higher than the world price of textiles. This suggests that, in the production of textiles, other countries have a comparative advantage over Vietnam and Vietnam will import textiles In analyzing the gains and losses from international trade, to say that Moldova is a small country is to say that Moldova is a price taker When a country allows trade and becomes an importer of bottled water, which of the following is not a consequence? The losses of domestic producers of bottled water exceed the gains of domestic consumers of bottled water Suppose the world price of a television is $300. Before Paraguay allowed trade in televisions, the price of a television there was $350. Once Paraguay began allowing trade in televisions with other countries, Paraguay began importing televisions and the price of a television in Paraguay decreased to $300 Which of the following statistics is usually regarded as the best single measure of a society's economic well-being? Gross domestic product If an economy's GDP falls, then it must be the case that the economy's income and expenditure both fall In the actual economy, goods and services are purchased by households, firms, and the government Which of the following is included in GDP? Both the market value of rental housing services and the market value of owner-occupied housing services Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has increased measured GDP by the value added by the restaurant's preparation and serving of the meals Martin, a U.S. citizen, travels to Mexico and buys a newly manufactured motorcycle made there. His purchase is included in Mexican GDP, but it is not included in U.S. GDP The income that households and noncorporate businesses receive is called personal income For the purpose of calculating GDP, investment is spending on capital equipment, inventories, and structures, including household purchases of new housing. Government purchases include spending on goods and services by federal, state, and local governments Net exports equal Y − (C + I + G) When economists talk about growth in the economy, they measure that growth as the percentage change in real GDP from one period to another The term economists use to describe a situation in which the economy's overall price level is rising is inflation A country reported nominal GDP of $100 billion in 2010 and $75 billion in 2009. It also reported a GDP deflator of 125 in 2010 and 120 in 2009. Between 2009 and 2010, real output and the price level both rose Suppose the government passes a law eliminating holidays and, as a result, the production of goods and services increases because people work more days per year (and thus enjoy less leisure per year). Based on this scenario, which of the following statements is correct? GDP would definitely increase because GDP excludes leisure. International studies of the relationship between GDP per person and quality of life measures such as life expectancy and literacy rates show that larger GDP per person is associated with longer life expectancy and a higher percentage of the population that is literate. A group of buyers and sellers of a particular good or service is called A market Which of the following is not a characteristic of a perfectly competitive market? There is no free entry or exit When we move along a given demand curve, all nonprice determinants of demand are held constant You lose your job and, as a result, you buy fewer iTunes music downloads. This shows that you consider iTunes music downloads to be a normal good Two goods are substitutes when a decrease in the price of one good decreases the demand for the other good Two goods are complements when a decrease in the price of one good increases the demand for the other good If Miguel expects to earn a higher income next month, he may choose to save less now and spend more of his current income on goods and services. Which of the following demonstrates the law of supply? When ketchup prices rose, ketchup sellers increased their quantity supplied of ketchup. Which of the following events would cause a movement upward and to the right along the supply curve for mangos? The price of mangos rises Ashley bakes bread that she sells at the local farmer's market. If she purchases a new convection oven that reduces the costs of baking bread, the supply curve for Ashley's bread will shift right. OR supply of Ashley's bread will increase Equilibrium price must decrease when demand decreases and supply does not change, when demand does not change and supply increases, and when demand decreases and supply increases simultaneously. Suppose there is a flood in St. Louis, Missouri, that destroys several beer bottling facilities. Which of the following would not be a direct result of this event? Buyers would not be willing to buy as much as before at each relevant price. When small changes in price lead to infinite changes in quantity demanded, demand is perfectly elastic, and the demand curve will be horizontal Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the money she needs. Your mother is paying for all of the ingredients. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade is elastic, what is your advice to her? Lower the price to increase total revenue For which of the following goods is the income elasticity of demand likely lowest? water Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is positive, and the good is a normal good. For which pairs of goods is the cross-price elasticity most likely to be positive? Pens and pencils The price elasticity of supply measures how much the quantity supplied responds to changes in the price of the good If the price elasticity of supply is 1.5, and a price increase led to a 1.8 percent increase in quantity supplied, then the price increase is about 1.20% A decrease in supply will cause the largest increase in price when both supply and demand are inelastic Which of the following statements is not correct concerning government attempts to reduce the flow of illegal drugs into the country? Drug interdiction shifts the demand curve for drugs to the left Demand is said to be inelastic if the quantity demanded changes only slightly when the price of the good changes. A good will have a more inelastic demand, the broader the definition of the market Which of the following is likely to have the most price elastic demand? Tommy Hilfiger jeans Assume that a consumer's indifference curve is bowed inward and negatively sloped. As the consumer moves from left to right along the horizontal axis, the consumer's marginal rate of substitution decreases A good is an inferior good if the consumer buys less of it when his income rises Which of the following costs of publishing a book is a fixed cost? Composition, typesetting, and jacket design for the book The average fixed cost curve always declines with increased levels of output A firm's opportunity costs of production are equal to its explicit costs + implicit costs Pete owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements? Shoe polish and rent on the shoe stand Kate is a florist. Kate can arrange 20 bouquets per day. She is considering hiring her husband William to work for her. Together Kate and William can arrange 35 bouquets per day. What is William's marginal product? 15 bouquets Eldin is a house painter. He can paint three houses per week. He is considering hiring his friend Murphy. Murphy can paint five houses per week. What is the maximum total output possible if Eldin hires Murphy? 8 houses Raiman's Shoe Repair produces custom-made shoes. When Mr. Raiman produces 12 pairs per week, the marginal cost of the 12th pair is $84, and the marginal revenue of the 12th pair is $70. What would you advise Mr. Raiman to do? Produce fewer custom-made shoes Scenario 14-1 Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. Refer to Scenario 14-1. To maximize its profit, the firm should decrease its output but continue to produce Which of the following expressions is correct for a competitive firm? Profit = (quantity of output) × (price − average total cost) Which of the following represents the firm's short-run condition for shutting down? Shut down if TR < VC Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to remain unchanged Which of the following statements is correct regarding competitive firms? Only for competitive firms does average revenue equal marginal revenue Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue does not change Suppose most people regard emeralds, rubies, and sapphires as close substitutes for diamonds. Then DeBeers, a large diamond company, has less market power than it would otherwise have When an industry is a natural monopoly, a larger number of firms will lead to a higher average total cost In order to sell more of its product, a monopolist must lower its price Which of the following statements is true? When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. For a monopoly, the socially efficient level of output occurs where price equals marginal cost For a firm to price discriminate, it must have some market power Which of the following is not an example of price discrimination? An ice cream parlor charges a higher price for ice cream than for sherbet. Which of the following is not an example of price discrimination by a firm? A natural gas company charging all customers a higher rate in the winter than in the summer Which of the following can defeat the profit-maximizing strategy of price discrimination? Arbitrage If a monopolist is able to perfectly price discriminate, consumer surplus and deadweight losses are transformed into monopoly profits. The collection of statutes aimed at curbing monopoly power is called antitrust law Which of the following statements is correct regarding monopolistic competition? Monopolistic competition is similar to monopoly because both market structures are characterized by firms being price makers rather than price takers. For a monopolistically competitive firm, at the profit-maximizing quantity of output, marginal revenue equals marginal cost Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium? P = AR In the long run, a monopolistically competitive firm produces a quantity that is less than the efficient scale Scenario 16-2 Delish, a moderately priced restaurant, has recently announced intentions to open a restaurant in Boston, MA. Assume that the restaurant market in Boston is characterized by monopolistic competition. Refer to Scenario 16-2. As a result of the new restaurant, consumers in Boston are likely to experience a product-variety externality, which is a positive externality A law that restricts the ability of hotels/motels to advertise on billboards outside of a resort community would likely lead to reduced efficiency of local lodging markets Roberto consumes Coke exclusively. He claims that there is a clear taste difference and that competing brands of cola leave an unsavory taste in his mouth. In a blind taste test, Roberto is found to prefer Coke to store-brand cola nine out of ten times. The results of Roberto's taste test would refute claims by critics of brand names that brand names cause consumers to perceive differences that do not really exist Which of the following statements is correct regarding duopolists? If duopolists successfully collude, then their combined output will be equal to the output that would be observed if the market were a monopoly. The equilibrium quantity in markets characterized by oligopoly is higher than in monopoly markets and lower than in perfectly competitive markets If duopoly firms that are not colluding were able to successfully collude, then price would rise and quantity would fall Whenever a cartel in a duopoly breaks down, total output in the market will rise. In a prisoners' dilemma game, if the players play the game repeatedly, the players can achieve a higher payoff, on average, than when they play the game only once. Which of the following groups or entities has the authority to initiate legal suits to enforce antitrust laws? Both the U.S. Justice Department and private citizens Consider a market served by a monopolist, Firm A. A new firm, Firm B, enters the market and, as a result, Firm A lowers its price to try to drive Firm B out of the market. This practice is known as predatory pricing [Show Less]
A trade _____ is an economic condition in which a nation imports more than it exports. deficit The _____ theory viewed international trade as a zer... [Show More] o-sum game. mercantilism Which of the following is a classical theory of international trade? Comparative advantage theory The _____ theory is based on the assumption that the wealth of the world is fixed. mercantilism Factor endowment is _____. the extent to which different countries possess various factors of production Which of the following describes the maturing stage in the product life cycle theory? The demand and ability to produce the product grow in developed nations. Which of the following is true of the strategic trade theory? It provides direct policy advice. Import quotas are a type of _____. nontariff barrier In the context of NTBs, _____ are bureaucratic rules that make it harder to import foreign goods. administrative policies _____ are politically motivated trade sanctions against foreign countries to signal displeasure. Trade embargoes Which of the following methods is directly derived from the theory of purchasing power parity (PPP)? The Big Mac index Which of the following is true of quantitative easing? It depreciates the currency that is being printed. A clean floating exchange rate policy is a government policy to _____. allow a currency's value to fluctuate according to the foreign exchange rate _____ have specified upper or lower bounds within which the exchange rate is allowed to fluctuate. Target exchange rates The bandwagon effect is an example of the way _____ directly affects foreign exchange rates. investor psychology The post-Bretton Woods system is a system of flexible exchange rate regimes with _____. no official common denominator If the forward rate of the euro per dollar is higher than the spot rate, the euro has a _____. forward discount The ____ is defined as the difference between the offer price and the bid price in a foreign exchange. Spread Which of the following is an advantage of a weak US dollar? Foreign tourists enjoy lower prices in the US _____ is the difference between two cultures along identifiable dimensions. Cultural distance Which of the following is true of modes of entry? Equity modes are indicative of relatively larger, harder-to-reverse commitments. Which of the following characterizes an MNE from a non-MNE? It enjoys OLI advantages. _____ are the most basic non-equity mode of entry, capitalizing on economies of scale in production concentrated in the home country and providing better control over distribution. Direct exports Which of the following is a disadvantage of licensing and franchising? Little control over marketing A disadvantage of acquisitions is _____. High development costs In _____, clients pay contractors to design and construct new facilities and train personnel. Turnkey Projects A greenfield operation refers to _____. a wholly owned subsidiary created by building a new factory and offices from scratch In the LLL framework, _____ refers to an emerging MNE's ability to identify and bridge gaps in its market. linkage If a firm produces nothing, which of the following costs will be zero? Variable cost Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that the average total cost when 5 units of output are produced is $30, and the marginal cost of the sixth unit of output is $60. What is the average total cost when six units are produced? $35 A firm produces 300 units of output at a total cost of $1,000. If fixed costs are $100, average variable cost is $3 If marginal cost is rising, marginal product must be falling Total cost is the market value of the inputs a firm uses in production A difference between explicit and implicit costs is that implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do Which of the following expressions is correct? accounting profit = economic profit + implicit costs Kate is a florist. Kate can arrange 20 bouquets per day. She is considering hiring her husband William to work for her. William can arrange 18 bouquets per day. What would be the total daily output of Kate's firm if she hired her husband? 38 Bouquets Ms. Joplin sells colored pencils. The colored-pencil industry is competitive. Ms. Joplin hires a business consultant to analyze her company's financial records. The consultant recommends that Ms. Joplin increase her production. The consultant must have concluded that , at her current level of production, Ms. Joplin's marginal revenue exceeds her marginal cost Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should continue flying until the lease expires and then drop the run The short-run supply curve for a firm in a perfectly competitive market is the portion of its marginal cost curve that lies above its average variable cost A firm that shuts down temporarily has to pay its fixed costs but not its variable costs The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average total cost Free entry means that no legal barriers prevent a firm from entering an industry Which of the following firms is the closest to being a perfectly competitive firm? A grain farmer in Illinois Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, the average revenue of the 200th unit will be $12 The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which profit is maximized Which of the following would be most likely to have monopoly power? A local cable TV provider If the distribution of water is a natural monopoly, then multiple firms would likely each have to pay large fixed costs to develop their own network of pipes Monopoly firms face downward-sloping demand curves, so they can sell only the specific price-quantity combinations that lie on the demand curve Bob's Butcher Shop is the only place within 100 miles that sells bison burgers. Assuming that Bob is a monopolist and maximizing his profit, which of the following statements is true? The price of Bob's bison burgers will exceed Bob's marginal cost A firm cannot price discriminate if it operates in a competitive market A movie theater can increase its profits through price discrimination by charging a higher price to adults and a lower price to children if it can prevent children from buying the lower-priced tickets and selling them to adults Suppose a monopolist is able to charge each customer a price equal to that customer's willingness-to-pay for the product. Then the monopolist is engaging in perfect price discrimination The process of buying a good in one market at a low price and selling the good in another market for a higher price in order to profit from the price difference is known as arbitrage Which of the following is not one of the ways that antitrust laws promote competition? Antitrust laws allow the government to shut down a firm if the government believes the firm has monopoly power. In order for antitrust laws to raise social welfare, the government must be able to determine which mergers are desirable and which are not Which of the following is an example of public ownership of a monopoly? U.S. Postal Service One characteristic of an oligopoly market structure is firms in the industry have some degree of market power A similarity between monopoly and monopolistic competition is that in both market structures sellers are price makers rather than price takers Product differentiation in monopolistically competitive markets ensures that, for profit-maximizing firms, price will exceed marginal cost In the short run, a firm operating in a monopolistically competitive market produces an output where marginal revenue equals marginal cost, and the price is determined by demand Which of the following conditions is characteristic of a monopolistically competitive firm in both the short run and the long run? P > MC In monopolistically competitive markets, economic losses suggest that some existing firms will exit the market Monopolistic competition is considered inefficient because price exceeds marginal cost Critics of advertising argue that in some markets advertising may decrease elasticity of demand allowing firms to charge a larger markup over marginal cost Professional organizations and producer groups have an incentive to restrict advertising in order to reduce competition on the basis of price Which of the following statements is correct? Brand names may help consumers if they provide information about the quality of a product when acquiring such information is difficult. If a certain market were a monopoly, then the monopolist would maximize its profit by producing 4,000 units of output. If, instead, that market were a duopoly, then which of the following outcomes would be most likely if the duopolists successfully collude? One duopolist produces 2,400 units of output and the other produces 1,600 units of output An oligopolist will increase production if the output effect is greater than the price effect If one firm left a duopoly market where the firms did not cooperate then price would rise and quantity would fall Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and finds a small bag of marijuana and arrests the two. During the interrogation, each is separately offered the following: "If you confess to dealing drugs and testify against your partner, you will be given immunity and released while your partner will get 10 years in prison. If you both confess, you will each get 5 years." If neither confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of marijuana. If each suspected drug dealer follows a dominant strategy, what should he/she do? Confess regardless of the partner's decision The Sherman Antitrust Act restricted the ability of competitors to engage in cooperative agreements A central issue in the Microsoft antitrust lawsuit involved Microsoft's integration of its Internet browser into its Windows operating system, to be sold as one unit. This practice is known as Tying Which of the following policies can the Fed follow to increase the money supply? Reduce the interest rate on reserves A problem that the Fed faces when it attempts to control the money supply is that the Fed does not control the amount of money that households choose to hold as deposits in banks Which of the following both increase the money supply? A decrease in the discount rate and a decrease in the interest rate on reserves In the special case of the 100-percent-reserve banking, the money multiplier is 1 and banks do not create money Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8 percent, and excess reserves amount to $5 billion. What is the level of deposits? $4,937.5 billion In a system of 100-percent-reserve banking, banks do not influence the supply of money Which of the following is correct? The Federal Reserve has 12 regional banks. The Board of Governors has up to 7 members who serve 14-year terms. Which of the following is included in M2 but not in M1? Savings deposits The set of items that serve as media of exchange includes demand deposits Money is the most liquid asset but an imperfect store of value Which of the following lists is included in what economists call "money"? Cash With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important? Interest-rate effect, exchange-rate effect, wealth effect In recent years, the Federal Reserve has conducted policy by setting a target for the federal funds rate Liquidity preference theory is most relevant to the short run and supposes that the interest rate adjusts to bring money supply and money demand into balance. If the Fed increases the money supply, the interest rate decreases, which tends to raise stock prices. If the Fed conducts open-market purchases, the money supply increases and aggregate demand shifts right. Changes in the interest rate shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level. If the MPC = 4/5, then the government purchases multiplier is 5 Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would shift aggregate demand right by a larger, equal, or smaller amount than the increase in government expenditures. Assume the MPC is 0.625. Assume there is a multiplier effect and that the total crowding-out effect is $12 billion. An increase in government purchases of $30 billion will shift aggregate demand to the right by $68 billion A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was likely smaller than if the cut had been permanent Suppose there was a large increase in net exports. If the Fed wanted to stabilize output, it could decrease the money supply, which will increase interest rates Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment? Increase government expenditures During recessions, taxes tend to fall and thereby increase aggregate demand Import quotas and tariffs produce some common results. Which of the following is not one of those common results? Equal revenue is always raised for the domestic government. The world price of a ton of steel is $1,000. Before Russia allowed trade in steel, the price of a ton of steel there was $650. Once Russia allowed trade in steel with other countries, Russia began exporting steel and the price per ton in Russia increased to $1,000. Representative Vazquez cites the "jobs argument" when he argues before Congress in favor of restrictions on trade; he argues that everything can be produced at lower cost in other countries. The likely flaw in Representative Vazquez's reasoning is that he ignores the fact that the gains from trade are based on comparative advantage. If the Korean steel industry subsidizes the steel that it sells to the United States, the harm done to U.S. steel producers is less than the benefit that accrues to U.S. consumers of steel. When a country that imports a particular good imposes a tariff on that good, consumer surplus decreases and total surplus decreases in the market for that good. The problem with the protection-as-a-bargaining-chip argument for trade restrictions is if it fails, the country faces a choice between two bad options. A tax on an imported good is called a tariff Suppose Japan exports cars to Russia and imports wine from France. This situation suggests Japan has a comparative advantage relative to Russia in producing cars, and France has a comparative advantage relative to Japan in producing wine. When a country allows trade and becomes an exporter of a good, which of the following is not a consequence? The losses of domestic consumers of the good exceed the gains of domestic producers of the good. If the cost of producing sofas decreases causing the price of sofas to decrease, consumer surplus in the sofa market will increase Motor oil and gasoline are complements. If the price of motor oil increases, consumer surplus in the gasoline market may increase, decrease, or remain unchanged. What happens to consumer surplus in the cell phone market if cell phones are normal goods and buyers of cell phones experience an increase in income? Consumer surplus may increase, decrease, or remain unchanged. Justin builds fences for a living. Justin's out-of-pocket expenses (for wood, paint, etc.) plus the value that he places on his own time amount to his cost of building fences. At Nick's Bakery, the cost to make a cheese danish is $1.50 per danish. As a result of selling 10 danishes, Nick experiences a producer surplus in the amount of $20. Nick must be selling his danishes for $3.50 each Which of the following events would increase producer surplus? Sellers' costs stay the same and the price of the good increases. If an allocation of resources is efficient, then all potential gains from trade among buyers are sellers are being realized. Steak and chicken are substitutes. A sharp reduction in the supply of steak would decrease consumer surplus in the market for steak and increase producer surplus in the market for chicken. On a graph, consumer surplus is represented by the area below the demand curve and above price. Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book? $8 Billie Jo values a stainless steel dishwasher for her new house at $500, but she succeeds in buying one for $425. Billie Jo's willingness to pay for the dishwasher is $500 Gross domestic product measures income and expenditures. In a simple circular-flow diagram, total income and total expenditure are always equal because every transaction has a buyer and a seller. According to the circular-flow diagram GDP, can be computed as either the revenue firms receive from the sales of goods and services or the payments they make to factors of production. Which of the following is included in the calculation of GDP? The purchase of tutoring services from a tutor who holds citizenship outside the country but resides within the country. A farmer produces oranges and sells them to Fresh Juice, which makes orange juice. The oranges produced by the farmer are called intermediate goods. Which of the following correctly orders U.S. income measures from largest to smallest? Gross national product, net national product, national income, personal income, disposable personal income In the national income accounts, depreciation is called "consumption of fixed capital." Disposable personal income is the income that households and noncorporate businesses have left after paying taxes and non-tax payments to the government. Which of the following items is the one type of household expenditure that is categorized as investment rather than consumption? The purchase of a new house A transfer payment is a payment made by government, but not in exchange for a currently produced good or service. A Texas household receives a Social Security check for $1500, which it uses to purchase a $40 pair of shoes made in Thailand by a Thai firm, a $1240 television made by a Korean firm in Korea, and $220 on groceries from a local store. As a result, U.S. GDP increases by $220. If total spending rises from one year to the next, then either the economy must be producing a larger output of goods and services, or goods and services must be selling at higher prices, or both. The GDP deflator is the ratio of nominal GDP to real GDP multiplied by 100. If real GDP doubles and the GDP deflator doubles, then nominal GDP quadruples. During a presidential campaign, the incumbent argues that he should be reelected because nominal GDP grew by 12 percent during his 4-year term in office. You know that population grew by 4 percent over the period and that the GDP deflator increased by 6 percent during the past 4 years. You should conclude that real GDP per person grew, but by less than 12 percent. Countries with low GDP per person tend to have higher rates of infant mortality. [Show Less]
view that claims phenomenon of globalization was initially driven by the desire of Western economies to exploit their power through MNE's new view ... [Show More] that claims globalization is a long-run historical evolution since the dawn of humanity. Says it is nothing new and that it will always exist evolutionary view that claims globalization is swinging from one extreme to another from time to time pendulum investment in, controlling, and managing value-added activities in other countries foreign direct investment political view hostile to FDI. believes it is an instrument of imperialism and vehicle for exploitation of domestic resources by foreign capitalists and firms radical suggests that FDI, unrestricted by government intervention, will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services free market views FDI as having pros and cons and only approving FDI when its benefits outweigh costs pragmatic nationalis what benefits exist to a country receiving FDI? capital inflow, technology spillovers, advanced management know-how, creates jobs what costs exist to a country receiving FDI? loss of sovereignty, adverse effects on competition, net outflow in the capital account The aggregation of importing and exporting that leads to the country-level trade surplus or deficit. balance of trade firms with a _____ degree of resource similarity are likely to have similar competitive actions high a high degree of resource similarity but low market commonality = _______ intensity of rivalry highest little resource similarity but high market commonality = _____ intensity of rivalry lowest mercantilism, absolute advantage and comparative advantage belong to what theory of international trade classical theory of international trade that relies on more realistic product life cycles and first mover advantages modern under free trade, a nation gains by specializing in economic activities in which it has _____advantage absolute focuses on the idea that if a country does not have absolute advantage, they can still choose to specialize in the production of one good where it has ______ advantage comparative comparative advantage and absolute advantage stem from factor endowments theory that the wealth of the world is fixed and that a nation that imports more and exports less will be richer mercantilism stage of the product life cycle where production of a new product that commands a price premium will concentrate in the US new stage of the product life cycle where demand and ability to produce grow in other developed nations maturing stage of the product life cycle where the previously new product is commoditized and production will now move to low-cost developing nations standardized comparative advantage may change over time because patterns of ______ change over time trade theory that suggests that intervention by governments in certain industries can enhance their odds for international success strategic trade if a company seeks to limit foreign exchange rate exposure in the forward direction, what is the most effective way to do this? currency hedging exchange rate risk associating with the time delay between entering a contract and settling it transaction risk forward transaction that protects traders and investors from exposure to fluctuations of the spot rate hedging a means of spreading out activities in different currency zones in order to offset the currency losses in certain regions through gains in other regions strategic heding amount of resources committed to entering a foreign market scale of entry how do institutions reduce uncertainty? by signaling which conduct is legit and which is not pillar of formal institution, coercive power of government regulatory pillar of informal institution, the mechanism through which norms influence individual and firm behavior normative pillar of informal institution, taken for granted values and beliefs that guide behavior cognitive institutions represented by laws, regulations and rules formal institutions represented by norms, culture and ethics informal the necessity of making rational decisions in the absence of complete information bounded rationality bounded rationality is a position in which view of global business institution political system that affects global business with an individuals right to freedom of expression and organization democracy political system that affects global business with hostility towards business, higher political risk such as nationalism totalitarianism political system where citizens elect representatives to govern the country on their behalf democracy political system where one person or party exercises absolute political control over the population totalitarianism law that uses comprehensive statutes and codes as a primary means to form legal judgements civil law that is shaped by precedents and traditions from previous judicial decisions common law that is based on religious teachings theocratic less confrontational, shorter, less specific form of law civil common law is ______ flexible than civil law more the legal right to use an economic resource and to derive income and benefits from it property right legal rights awarded by government authorities to investors of new products or processes who are given monopoly rights to derive income from inventions patent exclusive legal rights of authors and publishers to publish and disseminate their work copyright exclusive legal rights of firms to use specific names, brands and designs to differentiate their products trademark characterized by the invisible hand of market forces where the government takes a hands off approach market factors of production should be government owned or state owned and all supply, demand and pricing are planned by the government command the economic system of most countries mixed economy a curve that represents a consumers preferences indifference curve ________ indifference curves are preferred to ______ ones higher, lower indifference curves are bowed ______ inward the rate at which a consumer is willing to substitute one good for another marginal rate of substitution the limit on consumption bundles that a consumer can afford budget constraint a piece of analysis that shows the combination of goods the consumer can afford given their income and price of goods budget constraint an increase in income will shift the budget constraint ________ outward the slope of the indifference curve equals the slope of the budget constraint the consumer chooses consumption of the two goods so that the marginal rate of substitution equals the relative price the increase in total cost that results from adding an additional unit of production marginal cost formula to calculate marginal cost change in total cost / change in quantity a firm will produce the quantity where MR = MC as long as ________ price > AVC when price falls below the AVC, what will a firm do? shut down temporarily someone who has to take the market price of a product and accept it as their own price price taker the demand curve for a perfectly competitive firm is horizontal the demand curve for a monopolistic market is downward sloping where do firms with market power determine the quantity of product/service they will produce? quantity where MR = MC, quantity where P = MC where will firms with price setting capacity maximize profits? intersection between the marginal cost curve and the marginal revenue curve a market with only a few sellers offering similar or identical products oligopoly a firm is a sole seller of a product with no close substitutes monopoly many firms sell similar products but not identical. many firms compete for the same customers, free entry and exit monopolistic competition many buyers and sellers, identical products, free entry and exit, perfect information, price taker perfectly competitive what may rare, precious, and hard-to-duplicate resources and capabilities lead to for a firm? sustained comparative advantage company strategies must consider actions by rival firms is a lesson learned from what prisoners dilemma about oligopoly what prevents oligopolistic firms from behaving like monopolies? antitrust laws oligopolies are best off when producing a ______ quantity of output and charging a price ______ marginal cost small, above decrease in income _______ demand for normal goods decreases decrease in income ______ demand for inferior goods increases increase in income _____ demand for inferior goods decreases increase in income ______ demand for normal goods increases good in which people will purchase more of as their income increases normal good good in which people will purchase less of as their income increases inferior good coke and pepsi are examples of substitutes hot dogs and hot dog buns are examples of complements normal and inferior goods, complements and substitutes, expectations about the future and tastes and number of buyers influence the position of the demand curve demand that is greater than one elastic demand that is less than one inelastic how is income elasticity measured? percentage change in quantity demanded / percentage change in income a change in price will cause a large change in the quantity demanded elastic a change in price will not cause a large change in the quantity demanded inelastic the percentage change in price is equal to the percentage change in quantity demanded unit-elastic necessities have a _____ income elasticity small luxuries have a ______ income elasticity large how the quantity demanded of one good changes in response to a change in the price of another good cross-price elasticity substitute goods have a ______ cross elasticity positive complementary goods have a _____ cross elasticity negative price elasticity of demand equation % change in quantity demanded / % change in price income elasticity of demand equation % change in quantity demanded / % change in income cross elasticity of demand equation % change in quantity demanded of Y / % change in price of X tools the federal reserve has in regards to monetary control open market operations, discount rates, reserve ratios purchase or sale of US treasury or US government bonds in the open market open market operations when the fed buys bonds, what happens to the money supply and AD? increases money supply and shifts AD to the right when the fed sells bonds, what happens to the money supply and AD? decreases money supply and shifts AD to the left the interest rate on loans that the Fed makes to the bank discount rate reducing the discount rate does what? increases money supply, increases AD increasing the discount rate does what? decreases money supply, decreases AD ratio of money that banks are required to hold whenever an entity deposits money with them reserve ratio when the reserve ratio is increased, what happens to the money supply and AD decreases, shifts to the left when the reserve ratio is decreased, what happens to the money supply and AD increases, shifts to the right if the government uses fiscal policy and cuts taxes, what effect will this have on interest rates and AD? cutting taxes will increase demand for money, increase interest rates and cause AD to shift to the right the difference between what a buyer is willing to pay for a good or service and what they actually pay consumer surplus consumer surplus is measured in the area _____ the demand curve, _______ the price, _______ the quantity consumed under DC, above price, up to quantity consumed the benefit sellers receive from participating in a market producer surplus producer surplus is measured in the area ______ the supply curve, _____ the price, ______ the quantity supplied above, below price, up to total surplus equation value to buyers - cost to sellers the study of economy wide phenomena such as inflation, unemployment and economic growth macroeconomics the study of how households and firms make decisions and how they interact in markets microeconomics income must _______ expenditure in an economy equal the market value of all final goods and services produced within the border of a given country during a specified period of time gross domestic product gross domestic product measures what two things? total amount of expenditures and total income of everyone in the economy 4 components of GDP 1. consumption 2. investment 3. government purchases 4. net exports (exports minus imports) which payments are not counted in government expenditures? transfer payments, social security a tax on goods produced abroad and sold domestically tariff a method used to restrict international trade by taxing imported goods tariff the fall in total surplus that results from a tax deadweight loss financial environment in which exchange rates and payments for goods and services are conducted international monetary system what happens to a country's real exchange rate and nominal interest rate as the price level increases exchange rates depreciate, interest rates increase easiest method non financial companies use to handle currency fluctuations currency diversification strategy that minimizes the risk of unanticipated changes in future exchange rates currency swap a non equity arrangement for a company contemplating entry into a foreign market licensing What size commitment is required for a non-equity mode of entry into a foreign market? small two supportive pillars of an informal institution normative and cognitive reducing uncertainty is the key role of an institution according to which view institution based view the rules, enforcement mechanisms, and organizations that support market transactions are referred to as _____. institutions two polar types of economies centrally planned and market in addition to improving efficiency, why might a government intervene in a market? to promote equality what is the relationship between marginal cost and total cost? marginal cost is the change in total cost divided by the change in quantity a seller maximize profits in a perfectly competitive market by producing the quantity where P = MC the economic profit of a competitive firm is the difference between _______ and _______ total revenue and total cost when average variable costs are above the price, what should a firm do? temporarily shut down what is the producers demand curve when the producer sells a differentiated product? downward sloping a competitive firms demand curve is ______ elastic than a monopoly's demand curve more at which point does a monopoly maximize profit? where MC = MR many firms and differentiated products monopolistic competition if the consumers budget constraint has shifted inwards, the consumer will buy ______ normal goods and ______ inferior goods fewer normal goods and more inferior goods if there is an increase in market demand in a perfectly competitive market, equilibrium price will ______ and equilibrium quantity will ______ they will both increase if both demand and supply decrease, what will happen to equilibrium price and quantity? quantity will decrease, but price can either increase or decrease [Show Less]
Tariff. Tax on goods produced abroad and sold domestically(tax on imported goods). A method used to restrict international trade. Dead weight loss.... [Show More] The fall in total surplus that results from a market distortion, such as a tax (new equilibrium price that is settled for the transaction will be higher and therefore some burden of this will be passed on to the consumer) How are tariff's and dead weight loss related? Explain. A tariff causes a deadweight loss because a tariff is a type of tax. Like most taxes, it distorts incentives and pushes the allocation of scarce resources away from the optimum. (Oversupply and under demand) Two primary categories of trade barriers Tariffs and Non-Tariff If an import tariff is imposed on coconuts that are imported into the U.S., how will this impact the price of coconuts for U.S. consumers? Increase the price. Why might a government be interested in imposing an import tariff on a good? What benefit would the government derive primarily? The tariff will reduce the amount of importans, increase the amount of exports. The primary benefit is that it raises revenue for the government. How would imposing an import tariff on cigars impact the domestic production of cigars? Quantity increases for exporting at world price. If an import tariff on coconuts was removed in the U.S., how would this impact the demand for coconuts by U.S. consumers? The demand would increase. What would happen to the overall domestic demand for a good if an import tariff were imposed on that good? It would increase. How does a tariff generally impact the following entities: consumers, producers, government? Compare the effects between the entities Domestic sellers are better off, and domestic buyers are worse off. In addition, the government raises revenue. Consumer surplus The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it Who receives consumer surplus? The buyer. In relation to the demand curve and price, how is consumer surplus measured? The area below the demand curve and above the price measures the consumer surplus in a market. Producer surplus The amount a seller is paid for a good minus the seller's cost of providing it Who receives producer surplus? The seller. In relation to the demand curve and price, how is producer surplus measured? The area below the price and above the supply curve measures the producer surplus in a market. How is total surplus determined? The total value to buyers of the goods, as measured by their willingness to pay, minus the total cost to sellers of providing those goods. In what ways might government or policy makers make use of surplus measures? To measure the economic well being of a society, in terms of efficiency and equality. (i.e. maximizing total surplus received (efficiency) and distributing economic prosperity (equality) uniformly among the members of society Macroeconomics The study of economy-wide phenomena, including inflation, unemployment, and economic growth. Microeconomics The study of how households and firms make decisions and how they interact in markets. Why must income equal expenditure in an economy as a whole? An economy's income is the same as its expenditure because every transaction has two parties: a buyer and a seller. Gross domestic product (GDP) The market value of all final goods and services produced within a country in a given period of time. Four components of GDP (1) Consumption (2) Investment (3) Govt purchases (4) Net exports Why are transfer payments such as social security not counted in government expenditures? Because they are not made in exchange for a currently produced good or service. Transfer payments alter household income, but they do not reflect the economy's production. Real GDP The production of goods and services valued at constant prices, ie. $1 Nominal GDP The production of goods and services valued at current prices, i.e. $1 in 2013, $2 in 2014, etc... Reason to measure GDP in real terms Because (answer) GDP is not affected by changes in prices, changes in (answer) GDP reflect only changes in the amounts being produced. [Show Less]
What is the change in total cost equal to in the marginal cost equation? Marginal cost multiplied by change in quantity. Fixed costs equal: Total ... [Show More] costs minus variable costs Economic profit is distinct from accounting profit because: Economic profit incorporates both explicit and implicit costs. Total costs include: Variable costs plus fixed costs. Marginal costs consider: The increase in total cost arising from an extra unit of production. What response best describes the relationship between marginal costs and total costs? Whenever marginal cost is less than average total cost, average total cost is falling. Which statement is true about productivity? The value of marginal product of labor equals wage in a competitive firm. A production function expresses the relationship between: Quantity of resource inputs and product/service outputs. Opportunity costs include: The income the entrepreneur could have earned working for an employer. Economists and decision makers study and then make decisions or judgments based on Marginal analysis. The primary reason that the marginal cost curve declines and then increases is: Firms experience increasing marginal product, then diminishing marginal product. Which of the following statements is accurate? Marginal costs eventually rise with the quantity of output. perfectly competitive firm finds that at current production levels marginal cost is greater than marginal revenue. What action should this firm take in order to pursue the maximization of profit? Decrease the target output. A competitive firm is characterized by Trading of identical products. Competitive firms experience marginal revenue that is: Equal to price n the short-run, a competitive firm would continue to produce under the following circumstance: Total revenue exceeds total variable costs. What fundamental shape does a demand curve take in a competitive market? Horizontal For a perfectly competitive firm which condition is true? The demand curve is the same as the marginal revenue curve. Which condition is true for perfectly competitive firms in the long-run? They will exit the market if total revenue is less than total costs. Which statement is true concerning marginal costs? Marginal costs typically decline and then increase with the quantity of output. What rule is used by perfectly competitive firms to determine shut-down in the short-run? Price is less than average variable costs. What is true of perfectly competitive firms in the long-run? Economic profits will not be achievable. What two market structures have common profit characteristics in the long run? Perfect competition and monopolistic competition. In what way does a monopoly's demand curve differ from a perfectly competitive firm's demand curve? The monopoly's demand curve is downward sloping and the competitive firm's demand curve is horizontal. Monopolistic firms seek to maximize profit. What condition allows them to achieve this goal? When marginal revenue equals marginal cost. In pursuing the maximization of profit, monopolies set price at a point that is: Above marginal cost. How does a monopoly's demand curve compare to the demand curve for a perfectly competitive firm? It is less elastic. A monopoly's demand curve is: The same as the market demand curve. What is a key characteristic of the demand curve for a monopoly? It is the same as the market demand curve. Which condition is NOT true of monopolies? They are welfare optimizing What is a key characteristic of a monopoly? One seller. What is the profit maximizing condition for a monopolist? Marginal revenue equals marginal cost. What statement is true about a monopolist's price? Price is above marginal cost. Monopolistic competition is characterized by: Ease of market entry and exit. An incentive to advertise exists for monopolistically competitive firms because: The products they sell are differentiated. Monopolistic competition is characterized by: Many firms selling differentiated products. How does a monopolistically competitive firm achieve some degree of control over its price? Advertising and a differentiated product In the long-run, how do monopolistically competitive firms garner economic profits? They earn zero economic profits in the long-run. What is true of a monopolistically competitive firm's demand curve? It is less elastic than a perfectly competitive firm. What characteristic does a monopolistically competitive firm have in common with a perfectly competitive firm? Cannot earn economic profits in the long-run. What is the primary goal of a firm in monopolistic competition? Profit maximization. Consider the choice that an oligopolistic firm has to either compete or to cooperate, collude and form a cartel with the only other existing firm in the market. What do game theory and the prisoner's dilemma teach regarding this firm's choice? It is difficult to maintain cooperation. In what way are an oligopoly and the prisoner's dilemma similar in nature? Both depict the difficulty of maintaining cooperative agreements. Why is studying the prisoner's dilemma applicable to business? It demonstrates the value of mapping out a potential strategy given the actions of rivals. In what way does self-interest influence each prisoner's decision in the prisoner's dilemma? Both prisoners will likely confess. How do self-interest and rivalry in an oligopoly affect each firm's market decisions? Collusion will fail and self-interest will prevail in the long-run. In the prisoner's dilemma, what is the likely outcome? Both prisoners will confess. What can we learn from game theory and the prisoner's dilemma about oligopolies? Strategy is affected by rivalries. [Show Less]
Federal reserve tools open market operations, discount rate, reserve requirement open market operations Buying & selling government securities to ... [Show More] change the supply of money Fed buys bonds -decrease in the federal funds rate -increase in money supply Fed sells bonds -increase in the federal funds rate -decrease in money supply discount rate rate the Federal Reserve charges for loans to commercial banks FED reduces discount rate The Fed can alter the money supply by changing the discount rate. Conversely, a lower discount rate encourages banks to borrow from the Fed, increasing the quantity of reserves and the money supply. Fed increases discount rate The Fed can alter the money supply by changing the discount rate. A higher discount rate discourages banks from borrowing reserves from the Fed. Thus, an increase in the discount rate reduces the quantity of reserves in the banking system, which in turn reduces the money supply reserve ratio the fraction of deposits that banks hold as reserves What would the Fed need to do with the reserve ratio in order to increase the money supply and aggregate demand in the economy? Buys bonds from the public. Each new dollar deposited in a bank increases the money supply by more than a dollar because it increases reserves and, thereby, the amount of money that the banking system can create. What would the Fed need to do with the reserve ratio in order to decrease the money supply and aggregate demand in the economy? It sells government bonds to the public in the nation's bond markets. The public pays for these bonds with its holdings of currency and bank deposits, directly reducing the amount of money in circulation. If the Fed uses monetary policy in a way that increases money supply, what effect will this have on interest rates and aggregate demand (consider them separately)? When the Fed increases the money supply, it lowers the interest rate and increases the quantity of goods and services demanded for any given price level, shifting the aggregate-demand curve to the right. Conversely, when the Fed contracts the money supply, it raises the interest rate and reduces the quantity of goods and services demanded for any given price level, shifting the aggregate-demand curve to the left. monetary policy Government policy that attempts to manage the economy by controlling the money supply and thus interest rates. fiscal policy Government policy that attempts to manage the economy by controlling taxing and spending. If the government uses fiscal policy to increase government spending what impact will this have on interest rates and aggregate demand? The aggregate-demand curve shifts to the right. If the government uses fiscal policy and cuts taxes, what effect will this have on interest rates and aggregate demand? The tax cut shifts the aggregate-demand curve to the right. A tax increase depresses consumer spending and shifts the aggregate-demand curve to the left. Effect of Income change on demand curve shifts the demand curve Normal goods vs inferior goods If the demand for a good falls when income falls, the good is called a normal good. If the demand for a good rises when income falls, the good is called an inferior good. Explain how the price of related goods is related to changes in the demand curve? Shifts the demand curve Law of Demand consumers buy more of a good when its price decreases and less when its price increases demand curve a graph of the relationship between the price of a good and the quantity demanded Demand Curve Shifters number of buyers, income, prices of related goods, tastes, expectations Law of Supply producers offer more of a good as its price increases and less as its price falls supply and demand curve Graph that includes both a supply curve and a demand curve. It shows the relationship between prices and the quantities of a product or service that is supplied and demanded. Elastic vs. Inelastic Elastic: describes demand that is very sensitive to a change in price Inelastic: Describes demand that is not very sensitive to a change in price price elasticity of supply a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price price elasticity of demand a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price Income Elasticity A measure of how sensitive consumption of good X is to a change in a consumer's income cross price elasticity the percentage change in demand for product A that occurs in response to a percentage change in price of product B In the net, how are price (P) and quantity (Q) changed by a simultaneous increase in demand and decrease in supply? Increase in demand leads to an increase price and quantity Decrease in supply leads to increase in prices and decrease of quantity increase in demand and decrease in supply increase in P and increase or decrease, or constant Q In the net, how are price (P) and quantity (Q) changed by a simultaneous decrease in demand and supply? Decrease in demand leads to lower prices and lower quantity. Decrease in supply leads to higher prices and lower quantity Decrease in demand and supply increase or decrease, or constant P and decreases Q. In the net, how are price (P) and quantity (Q) changed by a simultaneous decrease in demand and increase in supply? Decrease in demand leads to lower prices and increased quantity Increase in supply leads to lower prices and an increase in quantity. Decrease in demand and increase in supply Decrease in P and increase, decrease, or constant Q. In the net, how are price (P) and quantity (Q) changed by a simultaneous increase in demand and supply? Increase in demand leads to an increase price and quantity Increase in supply leads to a decrease in price and increase in quantity increase in both demand and supply increase or decrease, or constant P and increases Q. [Show Less]
Which view claims that the phenomenon of globalization was initially driven by the desire of Western economies to exploit their power through multinational... [Show More] enterprise? The new-force view Economic gains come from international trade because one country's exported goods, services, or other items are unique, valuable, and difficult to duplicate to the importing countries. Which view does this statement portray? Resource-based view What is the aggregation of importing and exporting that leads to the country-level trade surplus or deficit? Balance of trade What is a cost of foreign direct investment? Developing countries may be exploited by multinational enterprises (MNE). What may precious, rare, and hard-to-duplicate resources and capabilities lead to for a firm? Sustained comparative advantage Which theory states that patterns of international trade change across new, maturing, and standardized states? Product life cycle theory What is the financial environment in which exchange rates and payments for goods and services are conducted? International monetary system What happens to a country's real exchange rate and nominal interest rate as the price level increases, assuming all other factors are unchanged? Exchange rates depreciate; interest rates increase What is the easiest method nonfinancial companies use to handle currency fluctuations? Currency diversification Which strategy minimizes the risk of unanticipated changes in future exchange rates? Currency swap A company is looking for a location with an abundance of ground-breaking individuals, firms, and universities. Which type of strategic goal is this company demonstrating? Innovation-seeking What advantage comes with not sharing benefits with late entrants? First-mover advantage Which entry mode is a non-equity arrangement for a company entry into a foreign market? Licensing What size commitment is required for a non-equity mode of entry into a foreign market? Small commitment What are two supportive pillars for an informal institution? Cognitive, Normative What is the key role of an institution, according to the institution-based view? To reduce uncertainty What are the rules, enforcement mechanisms, and organizations that support market transactions? Institutions What is a core proposition underpinning an institutional-based view of global business? Bounded rationality In which type of political system do citizens elect representatives to govern the country on their behalf? Democracy Which legal system uses comprehensive lists of rules and written codes? Civil law What are the legal privileges associated with the use of economic property to obtain income and other benefits from its use? Property rights What is the purpose of having property rights and intellectual property rights? To legally protect the use of tangible and intangible property and allow its lawful owner to derive income and other benefits from it. What are the two polar types of economies? Centrally planned economies, Market economies In addition to encouraging efficiency, why might a government intervene in a market? To promote equality What is the relationship between total and marginal cost? Marginal cost is the change in total cost divided by the change in quantity A farmer sells wheat in a perfectly competitive market. Which action should the farmer take to maximize profits? Produce the quantity where the price equals the farmer's marginal cost What is the economic profit of a competitive firm? The difference between total revenue and total cost What condition applies when a competitive firm decides to temporarily shut down? Average variable costs are above the price. What is the producer's demand curve if the producer sells a differentiated product? Downward sloping Which statement describes a competitive firm's demand curve? It is more elastic than a monopoly's demand curve. What is the point at which a monopoly maximizes profit? Where marginal cost equals marginal revenue What is a characteristic of monopolistic competition? Many firms and differentiated products What is a likely outcome of the standard prisoner's dilemma game? Both prisoner's confess How does the prisoner's dilemma help in understanding company behavior in an oligopoly? Company strategies must consider actions by rival firms. What do economists use to represent a consumer's preferences? Indifference curves What can be assumed that the consumer will buy if it is observed that the consumer's budget constraint has shifted inward? Fewer normal goods and more inferior goods What will happen to the market price and quantity in the short run if there is an increase in market demand in a perfectly competitive market? The equilibrium price will increase, and the equilibrium quantity will increase. What will happen to equilibrium quantity and price if both demand and supply increase? Quantity will decrease but price can either increase or decrease. What happens to demand quantity for normal goods as percentage change in income increases? Demand increases What do the positive or negative numbers of cross-price elasticity represent? Substitutes or complements What is one way the Federal Reserve influences the reserve ratio? By altering reserve requirements Which fiscal policy would be most effective at raising consumer spending and expanding aggregate demand? Enacting a permanent income tax cut What is the effect of an increase in the money supply in the short run? Interest rates decrease and aggregate demand for goods and services increase. How is consumer surplus represented on a graph? The area below the demand curve and above the price What two statements define producer surplus? The amount the seller is paid minus the cost of production. The area below the price and above the supply curve on a graph. A painter spends $200 on paint. He then bills the homeowner $1,000 to cover his time and expenses. What is the amount of these transactions that is added to gross domestic product (GDP)? $1,000 A U.S. state purchases a fleet of new highway patrol vehicles manufactured in Japan. Which two statements correctly describe how the components of U.S. gross domestic product (GDP) are affected? Net exports decrease Government expenditure increases A nation ends a tariff on bananas, which is an imported product. What will be the effect on banana prices within that nation? The price will match the global market price. What effect does implementing a new tariff have on the government that implements it? Tax revenue increases. [Show Less]
Views on Globalization
New, Evolutionary, and Pendulum
"New" view on globalization
A force sweeping through the world in recent times.
"Evo... [Show More] lutionary" view on globalization
A long-run historical evolution since the dawn of human history
"Pendulum" view on globalization
One that swings from one extreme to another from time to time
Foreign Direct Investment
Direct investment in, control, and management of value-added activities in other countries
Political views on FDI
Radical View, Free Market View, Pragmatic Nationalism
Benefits to a country receiving FDI
Capital Inflow, Technology Spillover, Advanced Management Know-How, Job creation
Costs to a country receiving FDI
Loss of Sovereignty, Adverse effects on competition,
Capital outflow.
How do resources and capabilities influence the competitive dynamics of a business?
Resource similarity and market commonality can yield a powerful framework for competitor analysis.
Resource similarity
The extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the focal firm.
How does resource similarity impact competitive dynamics?
Firms with a high degree are likely to have similar competitive actions. (Starbuck's instant coffee & McDonald's iced coffee)
Classical theories of international trade
Mercantilism, Absolute advantage, and Comparative advantage
Modern theory view
Dynamic
Classical theory view
Static
Absolute advantage
The economic advantage one nation enjoys that is superior to other nations
Comparative advantage
The advantage one economic activity nation enjoys in comparison with other nations (relative, not absolute)
Mercantilism
A theory that suggests that the wealth of the world is fixed and that a nation that exports more and imports less will be richer.
Features of the product life cycle?
New, Maturing, and Standardized
Strategic trade
Intervention by governments in certain industries can enhance their odds for international success.
How are supply and demand related to the exchange rate of a country?
The price of a commodity, a country's currency, is fundamentally determined by this. Strong demand leads to price hikes; oversupply results in price drops.
Which theory came first?
Mercantilism (although both are of the idea that governments should actively protect domestic industries from imports and vigorously promote exports)
If a company seeks to limit foreign exchange rate exposure in the forward direction, what is the most effective way to do this?
Forward transactions, an act know as currency hedging.
Transaction risk
The exchange rate risk associated with the time delay between entering into a contract and settling it.
Hedging
A transaction, such as forward transactions, that protects traders and investors from exposure to the fluctuations of the spot rate.
Currency hedging
A way to protect traders and investors from being exposed to the fluctuations of the spot rate
Strategic hedging
A means of spreading out activities in different currency zones in order to offset the currency losses in certain regions through gains in other regions (currency diversification)
First mover advantages
Proprietary, technological leadership, pre-emption of scarce resources, establishment of entry barriers to late entrants, avoidance of clash with dominant firms at home, relationships with key stakeholders, (such as governments.)
Late mover advantages
Opportunity to free ride on first-mover investments, Resolution of technological and market uncertainty, First mover's difficulty to adapt to market changes.)
Foreign market entries types
Non-equity and equity
Non-equity
Reflects relatively smaller commitments to overseas markets. Determines firms MNE status.
Equity
indicative of relatively larger, harder-to-reverse commitments. Determines firms MNE status.
How do institutions reduce uncertainty?
Establish "rules of the game" that economic players play by. A standard to follow in order to survive and prosper. By signaling which conduct is legitimate and which is not, institutions constrain the range of acceptable actions.
Regulatory pillar
The coercive power of governments (laws, regs, rules)
Normative pillar
Values, beliefs, and actions of other relevant players (norms, cultures, ethics)
Cognitive pillar
The internalized, taken-for-granted values and beliefs that guide behavior. (beliefs between right/wrong)
Formal institution
One that include laws, regulations and rules
Informal institution
One that includes norms, cultures and ethics
What core propositions lie at the root of the institution based view on global business?
(1) managers and firms rationally pursue their interests and make choices within institutional constraints (bounded rationality)
(2) in situations where formal constraints are unclear or fail, informal constraints play a larger role in reducing uncertainty and providing constancy to managers and firms (personal relationships and connections)
The institution based view global business is grounded upon
The dynamic interaction between institutions and firms, and considers firm behaviors as the outcome of such an interaction.
How is global business affected by democracy?
An individual's right to freedom of expression and organization. For example, starting up a firm is an act of economic expression
How is global business affected by totalitarianism?
These countries often experience wars, riots, protests, chaos, and breakdowns, which result in higher political risk.
Democracy
Citizens elect representatives to govern the country on their behalf.
Totalitarianism
One person or party exercises absolute political control over the population.
Civil law
Law that uses comprehensive statutes and codes as a primary means to form legal judgments.
Common law
Law shaped by precedents and traditions from previous judicial decisions.
Theocratic law
A legal system based on religious teachings.
How do civil, common and theocratic laws compare?
Relative to civil law, common law has more flexibility because judges have to resolve specific disputes based on their interpretation of the law. Civil law has less flexibility because judges only have the power to apply the law.
Property right
The legal rights to use an economic resource and to derive income and benefits from it. Can be used as collateral for starting a firm; not as common in developing countries, therefore hindering economic growth.
Intellectual property right
Rights associated with the ownership. They primarily include rights associated with patents, copyrights, and trademarks.
Market economy
One that is characterized by the "invisible hand" of market forces-all factors of production should be privately owned.
Command economy
One that is defined by a government taking all factors of production to be government-owned or state-owned, and all supply, demand, and pricing are planned by the government.
Mixed economy
One has elements of both a market economy and a command economy. It boils down to the relative distribution of market forces versus command forces.
Indifference curve
A curve that shows consumption bundles that give the consumer the same level of satisfaction (i.e. combinations of pizza and Pepsi with which the consumer is equally satisfied.)
Four properties of an indifference curve
(1) Higher indifference curves are preferred to lower ones. People usually prefer to consume more goods rather than less.
(2) Indifference curves are downward sloping. The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for the other.
(3) Indifference curves do not cross.
(4) Indifference curves are bowed inward. The slope of an indifference curve is the marginal rate of substitution—the rate at which the consumer is willing to trade off one good for the other.
Marginal rate of substitution.
The rate at which the consumer is willing to trade off one good for the other (i.e. how much Pepsi the consumer requires to be compensated for a one-unit reduction in pizza consumption)
Budget constraint
The consumption bundles that the consumer can afford.
How might a budget constraint be impacted by an increase in income?
Additional bundles could be consumed with an increase in income.
Graphical elements needed to determine a consumer's optimal point of consumption
Indifference curve and budget constraint.
How is a consumer's optimal point of consumption determined precisely? What is the condition that must be met?
The point at which this indifference curve and the budget constraint touch (the best combination of pizza and Pepsi available to the consumer.) The marginal rate of substitution equals the relative price of the two goods.
Marginal cost
The increase in total cost that arises from an extra unit of production
How is marginal cost related to total cost?
The portion of total cost resulting from an extra unit of production.
Formula to calculate marginal cost
Change in total cost divided by change in quantity
If Dave's company has a total cost of $100 when quantity output is 5, and a total cost of $115 when quantity output is 6, what is the marginal cost of producing the 6th unit?
$15
Total cost is made of two types of costs, what are they?
Fixed and Variable.
How does a firm determine to shut down in the short-run? What rule characterizes this?
If the revenue that it would earn from producing is less than its variable costs of production. P
$65.45
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$65.45
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