Accounting and Banking
What is the balance sheet formula?
Assets= Liabilities + Bank Capital
How many producers are there in monopoly competition?
Just 1
Because banks have very liquid liabilities and very illiquid assets
What is an economy of scale?
when it gets cheaper to produce some good or service when you produce it in bulk
Reserve ratios state that banks have to keep some % of their total_______ in their reserves
deposits
How does producer surplus for a monopolist compare to the surplus of a producer under perfect competition?
Producer surplus is always maximized in a monopoly
How can bank runs be beneficial?
It keeps bankers honest, by keeping them from absconding with consumers money
What is an economy of scope?
When you can provide a handful of services based on the skills and resources you have laying around
3 methods for a bank to come up with cash for their reserves
1.) Loan from fed
2.) Sell off stocks
3.) Call loans
This idea involves charging people different prices for *the same* good, based on their willingness to pay
Price discrimination
2 ways to stop bank runs
FDIC insurance and capital rationing (we don't like that one)
This thing on the banks balance sheet can act as a safety net of a bank gives out bad loans
bank capital
Explain the difference between second and third degree price discrimination
2nd degree= menue of options
3rd degree= discounts to certain groups of people with low willingness to pay
Lending contracts based on sharing profits can backfire because of
moral hazard problem
(Star wars prequel investment example)
Why do banks not want to keep a lot of bank capital?
Holding ROA constant, a lower equity/asset ratio increases ROE
A hotelling model of product differentiation involves
differentiating your product according to the market space your competitiors occupy along some idealogical or taste spectrum (Beach icecream example)
Raising interest rates for loans too high can cause
adverse selection/ profit loss
Mutual Funds charge different management fees based off
the expertise of manager
the age/size of firm
offering other tie-in products
offering higher quality customer service
***Not based on performance of fund***