Study Questions For The Second Exam

ECON 365

These questions are not designed to take the place of studying your notes and the reading assignments.  Do not e-mail me and ask me to answer all or some of these questions for you.  If you have missed class, it is your responsibility to get the notes from another student.  Once you have answered these questions yourself, if you are unsure of any of your answers, let me know and I will tell you if you are correct or not.  Don't be afraid to ask me questions, I just want you to try to answer the questions yourself first.

Topic:  Market Demand

1. How do we find a market demand curve from individual demand curves?  Example?

2. Demonstrate how price elasticity of demand changes along a typically shaped demand curve?  Why does it change?

3. Graph the two polar cases (theoretically) - perfectly elastic and perfectly inelastic.

4. Demonstrate graphically and in words the relationship between total revenue (or expenditures) and the price elasticity of demand.

5. When is total revenue (or expenditures) maximized along a demand curve?  Why?

6. We can now discuss four determinants of the price elasticity of demand -- what is the fourth one we added and explain it.

7. Explain how the distribution of income might change market demand.  Graph?

8. What is the concept of income elasticity of demand?  Formula?

9. If the income elasticity of demand is positive -- what does that mean?  Negative?  What does that mean?

10. What is a "necessity" and a "luxury" with respect to the income elasticity of demand?

11. Compare Engel curves for a necessity and a luxury and an inferior good.

12. Why might an Engel curve have a "kink" in it?  Explain and give an example.

13. What is the concept of the cross-price elasticity of demand?  Formula?

14. If the cross price elasticity of demand is positive -- what does that mean?  Negative?  What does that mean?

15. Why might the cross price elasticity between two goods be different depending upon which good's price is changed?

Topic:  Applications of the Rational Choice Model

    1.  Make sure you understand all of the applications we did (of the rational choice model) - garbage collection, health care.

Topic:  Economics of Information

1. How is communication between potential adversaries (like people trading with each other) different from communication between people with the same goals?

2. What is signaling?

3. What are the two important properties to signaling if it is to be effective?

4. Explain the costly to fake principle and give some examples of signaling that is costly to fake

5. Explain the full disclosure principle and give some examples.

6. Explain the "lemons principle"  What are some criticisms of the theory?

7. The lemons principles "theoretically" says it is possible that a market would no longer exist because of the lemon problem - explain both in words and graphically.

8. Give an example of conspicuous consumption as ability signaling.

9. How does resale price maintenance decrease the free rider problem (what is the free rider problem)?

10. How is resale price maintenance then used to assure quality?

11. What are search costs?

12. How long will a consumer search (theoretically)?  Graph?

13. What does "price dispersion" mean and how does it relate to consumer search theory?

14. Advertising is designed to do two things to the demand curve.  What are they?  Graph?

15. Is advertising wasteful if it isn't successful?  Explain.

16. What is risk?  Uncertainty?

17. What is the law of large numbers? 

18. What are some examples of how people pool risk?

19. What is adverse selection?  Example?

20. What is moral hazard?  Example?

21. What is statistical discrimination?  Example? 

22. If insurance is mandated -- what are some unintended consequences that might happen?

Topic:  The Theory of the Firm - The Literature and Transaction Cost Economics

1. What economist is famous for asking the question:  "Why do firms exist?"

2. According to Coase, there are two ways of organizing inputs -- what are they?

3. According to Coase, when will we see internal organization (the firm)?

4. What are transaction costs?

5. How does Dahlman categorize transaction costs?

6. What does Coase say about uncertainty -- and how does uncertainly relate to transaction costs?

7. How does the entrepreneur fit into the theory of the firm -- what does he/she do?

8. What's the difference between vertical integration, horizontal integration, and conglomerate diversification?

9. When does Stigler say we will see vertical integration and when will we see vertical disintegration?

10. What is shirking?

11. What is Alchian and Demsetz theory as to why we see a firm (tools come under the same ownership)?  Make sure you know all parts of this theory.

12. According to Williamson, (and Klein, Crawford and Alchian) what is transaction cost economics?

13. What are the two behavioral assumptions that the transaction economists make?

14. What is opportunism?  What is bounded rationality?

15. What is asset specificity?  What are the four types?  Examples?

16. What are the three major ways a firm could acquire (or produce) an input?

17. When would the firm use a short term (spot) contract?

18. When would the firm use a long term contract?

19. When would the firm use vertical integration?

20. How does an exclusive dealings contract (when the manufacturer selling to only one retailer in an area) decrease free riding and give an incentive to the retailer to promote the manufacturers products over the other products the retailer is carrying?

21. What happened in the Fisher Body-GM case?  What did the study on franchising, specific assets and vertical integration do (what was the relationship they looked at) and find (what did the researchers find)?

Make sure you look over the homework, in class exercises, practice quizzes, and make sure you have read the articles on signaling and the Williamson reading.