February 8, 2023 

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DECISION LAG: The time lag that it takes government leaders and policy makers to determine the appropriate government action needed to address an economic problem. The decision lag arises because it takes time for policy makers to chose among the array of possible policy actions, each with assorted consequences that appeal differently to different political constituencies. This "inside lag" is one of four policy lags associated with monetary and fiscal policy. The other two "inside lags" are recognition lag and implementation lag, and one "outside lag" is implementation lag. All four policy lags can reduce the effectiveness of business-cycle stabilization policies and can even destabilize the economy.

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Lesson 20: Oligopoly | Unit 4: Analysis Page: 19 of 24

Topic: Game Theory <=PAGE BACK | PAGE NEXT=>

  • A handy way to analyze this type of market interdependence is through game theory.

  • Game theory is an analysis that illustrates how the choices between two players affect the outcomes of a "game."
  • Assume the market has only two firms, OmniCola and Juice-Up.

  • Each is thinking about spending $50 million on advertising.

  • This table presents alternative outcomes for different advertising choices by OmniCola and Juice-Up:

    1. If OmniCola and Juice-Up BOTH decide to advertising, then each receives $200 million in profit.

    2. However, if NEITHER OmniCola or Juice-Up decide to advertising, then each receives $250 million in profit.

    3. Alternatively, if OmniCola advertises but Juice-Up does not, then OmniCola receives $350 million in profit and Juice-Up receives only $100 in profit.

    4. But, if Juice-Up advertises and OmniCola does not, then Juice-Up receives $350 million in profit and OmniCola receives only $100 in profit.

  • What to do?

  • The end result is that both firms decide to advertise.

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A disruption of consumer equilibrium identified with utility analysis caused by changes in the buyers' income, which results in a change in the quantities of the goods consumed. The change in buyers' income alters the income constraint and forces a reevaluation of the rule of consumer equilibrium.

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Ragnar Frisch and Jan Tinbergen were the 1st Nobel Prize winners in Economics in 1969.
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