economics study guide #22

economics study guide #22 - Why do firms exist? More...

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Why do firms exist? More efficient than market exchange because requires coordination of many transactions. The more complicated the task, greater ability to economize on transaction costs. What are the efficient boundaries of the firm? Vertical integration is the expansion into stages of production earlier or later than specializes. One constraint is bounded rationality limits information manager can comprehend. More likely o buy if cheaper than making it, component well defined and quality easily observable, and there are many suppliers. What are economies of scope? Average costs decline as a firm makes more types of products. Optimal search occurs where marginal cost=marginal benefit What is the winner’s curse? The plight of winning bidder who overestimates assist’s true value What is asymmetric information? One side of the market knows more - information about product’s characteristics o hidden characteristics – one side of the market knows more (used car) when sellers have better info about quality than buyers, lower- quality products dominate market adverse selection – informed self-select to harm those uninformed - information about actions taken by other party o hidden actions – one side can do something other side cannot observe principal agent theory – agent’s objective differ from principal’s, and one side can pursue hidden actions - Problems o What is a moral hazard? When there is an incentive to alter behavior in way that harms other party (insurance) Efficiency wages – paying above market wage to attract more productive workers Signaling – proxy measure (years of education) Screening – (spelling and typos) Chap 15 What is market power? Ability of a firm to raise price without losing sales, any firm facing downward sloping curve, less than socially optimal. Government policies to control firm behavior: 1. social regulation – improve health and safety
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2. economic regulation – control the price, output, entry of new firms, quality of service What are public utilities? Government-owned or regulated monopolies. Forcing to produce where p=mb=mc results in economic loss and eventual going out of business. Government can subsidize so monopoly earns a normal profit (but to provide must raise taxes or decrease spending). P=ac is a fair price. Promote social welfare, with special interest of producers. Capture theory of regulation is producers’ political power in regulatory outcome, lead them to “capture” regulating agency to serve producer interests. 3. antitrust regulation – preventing monopoly and fostering competition in markets where competition is desirable (promote socially desirable market performance).
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economics study guide #22 - Why do firms exist? More...

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