Exam 3 Econ 102 Review

Why do cartels tend to be unstable and eventually fall apart?

Each firm has an incentive to cheat and go against the strategy that is best for the group, instead choosing a strategy that is best for themselves as an individual firm

Read Equal Pay for Equal Work from the Devil's Advocate Economics book. Which of the following is true, according to the reading

If two new workers at a firm earn different salaries, there are likely non-discriminatory explanations for the difference

Price taker

It must accept the equilibrium price at which it sells goods

Monopoly regulation

Limits on prices or profits of firm

Which of the following conditions hold true for both the perfectly competitive firm and the monopoly at the profit-maximizing output level?

MR = MC

Profit max condition

MR=MC; Determines q*

Importance of Entry Barriers in Monopoly

Makes LR Profit> 0 Possible

Product differentiation in monopolistic competition

goods are similar, but now identical

How is monopolistic competition similar to perfect competition?

free entry and long run profits go towards 0

Perfect competition is a market structure

in which individual buyers and sellers have no effect on the market price

The perfectly competitive firm cannot influence the market price because

its production is too small to affect the market

Advertising by monopolistically competitive firms can do all of the following EXCEPT

lower the price of the good

Examples of oligopoly

mail, cereal, chocolate, soft drinks, airlines

Why does oligopoly occur?

mergers, network effects, economies of scale, entry barriers

Strategic dependence of oligopoly

my strategy (p,q) depends on your strategy

Network effects

my value of a good depends on the size of the userbase ex: videogames, fax machines

How is monopolistic competition similar to monopoly?

negative sloped demand, P>MC at last unit (not by much)

Policy

Plays a role in politics and economics

A perfectly competitive firm is a...

Price taker

5 Characteristics of a monopoly

1. Entry barriers 2. One firm 3. No competition 4. Firm faces entire industry 5. D-curve

2 Examples of Perfect Competition

1. Farm Commodities 2. Stock Markets

Oligopoly 4 characteristics

1. Few competitors 2. entry barriers 3. market power 4. strategic dependence

Perfect Competition in the Long Run

1. Firm can enter/exit 2. In LR equilibrium profits go towards zero

4 Characteristics of Perfect Competition

1. Free Entry 2. Perfect Information 3. Homogenous goods 4. Many sellers

Examples of Entry Barries in Monopoly

1. Owning all resources 2. Economies of scale 3. Patents 4. Sabotage

When is price discrimination possible?

1. firm has market power 2. consumers with different valuations 3. no arbitrage

Types of Price Discrimination

1. perfect price discrimination -all consumers pay P=WTP, no CS 2. bulk discount 3. market segmentation -ex: student discount

characteristics of an oligopoly

1. small number of firms 2. high barriers to entry 3. interdependence

Price ceilings are

A legal maximum price

Price floors are

A legal minimum price

example of price discrimination

Anna takes her grandfather to the theater. Anna pays $12 for his ticket, but her grandfather only pays $8 for her ticket because of a senior citizen discount

The area of consumer surplus on graph is...

Between the demand curve and price

Where is monopoly inefficiency?

DWL

Price controls cause

Deadweight loss

Read the article posted at http://www.cnbc.com/id/101668360 (Links to an external site.). (If you've paid very close attention in class, you'll recognize the name of the town and the person in the article). Which of the following is true, according to the article?

Most businesses could be exposed to severe weather or natural disasters and some businesses are making sure they have proper insurance to deal with unexpected events

Deadweight loss

Occurs as a result of fewer trades and foregone surplus

In a long-run monopolistically competitive equilibrium,

P = ATC, and ATC is not at its minimum value

Which of the following is true of the price charged by a monopolistically competitive firm at the profit-maximizing level of output?

P > MC

In a perfect competition a single firm P=

P=MR (Marginal Revenue) at perfect equilibrium

When are monopolies desirable?

Perhaps, in the case of a natural monopoly with a large economies of scale

Homogenous goods mean

Products are identical from one seller to another, and sellers are price takers.

Profit equation

Profit = Total Revenue - Total Cost or Profit = Q(Profit - Average Total Cost)

Monopolistic competition long run

Profits = 0 mainly due to free entry

Read Don't Exchange Gifts at Christmas from the Devil's Advocate Economics book. According to the reading, why does giving gifts often result in deadweight loss and economic inefficiency?

Recipients of gifts place a value on the gift that is less than the price the giver paid for the gift

Monopolistic competition short run

See notes

Short run perfect competition; Shut down and break even

Shut down: MC intercepts min SRAVC Break even: MC intercepts min SRATC

The area of producer surplus on graph is...

The area between supply curve and price

Market structure is

The conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold

What is producer surplus?

The difference between marginal cost (MC) and price the good is sold at

In the long run equilibrium, monopolistic competition results in some deadweight loss because of fewer trades compared to perfect competition, and we also don't see productive efficiency due to slightly higher costs. Despite this, why might monopolistic competition still be desirable compared to perfect competition?

The higher costs of monopolistic competition are likely the result of product differentiation, and consumers may prefer to have variety and choice and are willing to pay for it

Menu costs

costs of charge in prices; high menu costs prices won't change as often

Price disrimination

firm charges different prices to different people for demand

When considering perfect competition, the absence of entry barriers implies that

firms can enter and leave the industry without serious impediments

Collusion

firms cooperate instead of compete -cartels are unstable

Multiproduct firms

firms that produce multiple goods, and therefore have to deal with allocating inputs more properly in order to attain higher production levels

If total revenue increases when a firm sells more units, then marginal revenue is

positive

Arbitrage

reselling of goods

Examples of product differentiation

restaurants, gas stations, retail clothing

One problem associated with a monopoly firm is that it

restricts output and charges a relatively higher price than a purely competitive industry

Other pricing strategies

see notes

What is consumer surplus?

the difference between the price the consumer is willing and able to pay (WTP), and the price they actually pay

A vertical merger involves

the joining of two firms at different stages of the production process for a single good

Advertising in monopolistic competition goals

to get more consumers and raise profits

Concentration ratio of oligopoly

what % of markets is owned by top 4 firms?

Compatibility

when to be compatible vs incompatible?