Managerial Analysis Final Exam

Front 1

What is the Nash Equilibrium?

Back 1

A theory that when both players of a game have no incentive (no benefit to) to change their strategy if the other player is not changing theirs.

Front 2

Why is cooperation in Game theory difficult to maintain?

Back 2

Companies might not trust each other and have incentives to cheat on agreements

Front 3

If games are finite (with an end) will you reach an optimal outcome?

Back 3

No - If you work backward, neither party has incentive to stick with the agreement as they know they end

Front 4

If the games are repeated with no end, will we end up with the optimal outcome?

Back 4

Yes - Each party will stick to agreement and will have the most profits

Front 5

In Game theory, when does equilibrium occur?

Back 5

When both firms choose the low choice

Front 6

How do companies use strategies to avoid sub-optimal outcomes in game theory?

Back 6

1. Loyalty programs
2. Legal agreements/contracts with rival firms (illegal in US - collusion)
3. Signals to show commitment

Front 7

What are the two types of asymmetric information?

Back 7

1. Adverse Selection (pre-transaction)
2. Moral Hazard (post-transaction)

Front 8

What is adverse selection and when does it occur?

Back 8

When the market is selecting the worst outcomes for goods and services and those dominate the market

Occurs Pre-transaction

Front 9

What are examples of adverse selection?

Back 9

- The insurance market - Healthy vs unhealthy person. THey can't see everything you do so they charge two people who seem similar the same price. The person who is healthy doesn't want to pay the price and the unhealthy person pays it

- the car market - when there is a median price for cars - extremely good and extremely bad because they can't tell the difference. The people with the great cars will remove them from the market because the selling price is too low.

Front 10

What is Moral hazard and when does it occur?

Back 10

When you have a transaction that changes your behavior and risk factors

Occurs post-transaction

Front 11

What are examples of moral hazard?

Back 11

Banks - when they are backed by the FDIC they might make riskier investments
Insurance - When you have health/home/car insurance you might take more risks because you know you have the insurance in case things go wrong

Front 12

How do you know when a firm should shut down operations in the short run?

Back 12

When P < AVC

Front 13

How do you know when a firm should exit the market in the long run?

Back 13

When P < ATC

Front 14

What are 5 reasons we prefer PC firms compared to Monopolies?

Back 14

1. In the LR, they operate at the most efficient production (Minimum ATC)
2. P = MC no matter what. Also considered efficient. THe price reflects the actual cost of making the product
3. No excessive profits
4. Price is lower and Quantity is bigger. Monopolies don't produce enough and the price is higher
5. No wasted money on rent seeking

Front 15

How/ Why do monopolies form? (5 reasons)

Back 15

1. Government regulations (grant monopoly power)
2. Patents/Copyrights
3. First mover advantage
4. Acquire other companies making their product
5. Geographic location

Front 16

What is rent seeking

Back 16

When a monopolist is willing to pay $$ to keep monopoly power that has no associated productivity

Front 17

What are two positive aspects of monopolies?

Back 17

1. Natural Monopolies are more efficient
2. Innovation

Front 18

What is price discrimination?

Back 18

The idea that you can differentiate prices based on different groups (occurs in monopolies)

Front 19

What are two conditions for Price discrimination to work?

Back 19

1. Need a way to segment the market
2. Can't allow arbitrage (transferring)

Front 20

In monopolies, the demand curve is sloped ___________ (upward/downward) and is equal to ____________

Back 20

slope downward, and is equal to price

Front 21

What is the basic assumption of the Kinked demand curve model?

Back 21

That a competitor will follow a price decrease but will not make a change in reaction to a price increase.

Front 22

What is price stickiness?

Back 22

it means that the prices charged for certain goods are reluctant to change despite changes in input cost or demand patterns.

Front 23

What is the output rule (how you choose Q*) for PC firms?

Back 23

P = MC

Front 24

What is the output rule (how you choose Q*) for Monopolies?

Back 24

MC = MR

Front 25

What is the output rule (how you choose Q*) for Monopolistic competition firms?

Back 25

MC = MR

Front 26

What is the output rule (how you choose Q*) for Oligopolies?

Back 26

MC = MR

Front 27

Which two types of firms have low barriers to entry and therefore no long run profits?

Back 27

PC and Monopolistic Competition firms

Front 28

Which two firms have high barriers to entry and therefore have LR profits?

Back 28

Monopolies and Oligopolies

Front 29

What is the formula for PV?

Back 29

FV / (1+k)^t

Front 30

What is the formula for FV?

Back 30

(1+k)^t * (PV)

Front 31

Why isn't future $$ worth as much as $$ today?

Back 31

-Inflation
-Risk
-Interest

Front 32

The ___________ (higher/lower) the discount rate, the more you need to be compensated for the discount in the future

Back 32

Higher

Front 33

What is the NPV?

Back 33

The Sum of all inflows minus the sum of all outflows, at the discount rate. If the NPV is positive, the project is financially acceptable. if the NPV is negative, the project needs to be rejected.

Front 34

What is the IRR?

Back 34

The internal rate of return - the K (interest rate) that makes NPV = 0. So you can see how much it's going to cost you to borrow $

Front 35

How do you calculate the expected value?

_
R

Back 35

Multiply the cash inflows by their probabilities and then add them together to get _
R

You determine the expected value to determine the Standard deviation (which specifies the extent of the risk)

Front 36

What are the 3 calculations you need to do to get the variance in a standard deviation equation?

Back 36

_
1. R - R
_
2. (R-R)^2
_
3. P*(R-R)^2

These give you the variance. Take the square root of the variance to get the Standard Deviation

Front 37

The _________ your standard deviation is, the better. Since you have less variability

Back 37

smaller

Front 38

What is the Coefficient of Variation and why do we use it?

Back 38

It measures risk relative to expected value. Used when two projects have different expected values

Front 39

What is the formula for Coefficient of Variation?

Back 39

Standard Deviation / _
R

Front 40

Is a smaller or larger coefficient of variation preferred?

Back 40

Smaller

Front 41

For monopolist competition firms, what happens when they start making profit?

Back 41

New firms will enter the market (low barriers to entry) and the demand curve will shift to the left. The demand curve will become flatter (more elastic) as their customers have more choices now.