Microeconomics Test #3

What are the main features of monopolistic competition?

- many small firms with a small market shares, similar to perfect competition - easy entry and exit, which is similar to perfect competition - product differentiation, which is similar to monopolies - close substitutes for product

In an example of voters and politicians, who are the principal and who are the agents?

- voters= principal - agent = politicians

Define the principal agent problem

1. any time owner is not the same as the manager 2. at firms 3. at government institutions

What are real differences in product?

1. design 2. better reliability and quality 3. service 4. location (real estate, gas station)

Define public choice theory

1. elections are costly, and the major source of money is lobbyists 2. lobbyists get something in return 3. sometimes the interest of the public conflicts with the interest of the lobbyists

What is the process of eliminating profit?

1. entry 2. increase in market supply 3. price goes down 4. profit goes down

What is the process of eliminating losses?

1. exits 2. decrease in market supply 3. price goes up 4. economic loss goes down until it hits 0

What makes something a public good?

1. has to be nonrival and nonexcludable 2. If only nonrival, not public good (ex: cable, pay-per-view)

What are the goals in regulating a natural monopoly?

1. lower price 2. increase output 3. eliminate economic profit

What are the conditions of the Coase Theorem?

1. number of people involved has to be small 2. well-defined property rights 3. low transaction costs

Define social interest theory

1. politicians have enough incentives to work under voters behalf and produce optimal public goods 2. because politicians are our agents, the threat of voting them out of office pressures them to produce the optimal level

What are the 3 problems with comparison to perfect competition?

1. price is too high 2. output is too low 3. economic profit in the long run, which means too much profit

What is the comparison of monopolistic and perfect competition regulation?

1. price is too high 2. output is too low 3. excess capacity 4. variety vs. price 5. role of advertising 6. innovation, research, investment

What does the government do in a market economy?

1. promote competition 2. promote economic stability 3. reducing income inequality 4. public goods 5. externalities

What are the conditions for perfect price discrimination?

1. seller (firm) should be able to divide its customers into well-defined groups based on ability to pay (or elasticity of demand) 2. Good should be difficult to resell

How do anti-trust laws deal with monopolies?

1. to prevent mergers between companies that lead to monopolies 2. deal with monopolies that are not natural, and if they do form, break them

Is MR higher or lower than P and why?

ALWAYS LOWER because we assume no price discrimination and lower price to attract customers

In the long run, what is P equal to?

ATC

What's another name for the demand curve?

MB curve

What is the rule for output determination of public goods?

MB greater than or equal to MC

How do you calculate marginal social costs?

MC + external cost

What is MSB and how do we calculate it?

Marginal Social Benefits= MB + External Benefits

How do you find TR?

P * Q

What creates the perception that products are different or better than others to convince you to pay a higher price?

advertising

What is an example of a positive externality?

beekeepers pay all the costs of keeping the bees, but farmers get the benefits of their pollination

Define externalities

being over or under produced

What is the impact of perfect price discrimination?

benefits firms by increasing profits by decreasing the consumer surplus, what consumers lose go to the firm

What is a patent-based barrier?

causes a temporary monopoly for however many years to cover the cost of research

How do you calculate MR?

change in TR/ change in Q

Are marketable permits centralized or decentralized?

decentralized

Which curve deals with price consumers are willing to pay?

demand

What is perfect price discrimination and what does it eliminate?

every customer is paying the highest price he/she is willing to pay, which eliminates the consumer surplus completely

Consumer subsidies (vouchers) are equal to

external benefits

What do we assume about marketable permits?

government doesn't know the costs for every firm

Define government provision

government itself produces the service or good supported by general tax revenue and gives it for free

Define public goods

important to society, but not profitable

Describe marketable permits

in the least costly way, give every firm a goal to reduce pollution and give them an incentive

What is the goal in dealing with positive externalities?

increase production

What is an excludable good?

it's possible to exclude those who don't pay from consuming that good

If MR intersects MC in the 2nd segment, what kind of monopoly is it?

legal

What is capacity equal to?

minimum ATC

If MR intersects MC in the 1st segment, what kind of monopoly is it?

natural

What are the two types of barriers to entry?

natural and legal

Which of the barriers is for economic reasons?

natural and legal

What do we assume about the pricing, d-curve, and MR curve?

no price discrimination, charge everyone the same no matter how much they're WILLING to pay

What is a nonexcludable good?

not possible to prevent consumption because it's expensive or impossible (ex: fire)

How do you calculate MB?

number of hours saved * average wage

What is a positive externality?

producer or consumer pays all the costs, but does not receive all the benefits

Which barrier is for political reasons?

public franchising

What is the pigovian tax theory?

tax goods that pollute to make producers pay the full costs to make them pollute less

What is a negative externality?

the firm doesn't pay all the costs of production and gets the benefits

Why do we have one firm in a monopoly market?

the government only has one permit to give out to one producer

Describe emission charges

the more you pollute, the higher your tax

When you charge emission, is the pollutant or the good taxed?

the pollutant

What is the Coase theorem?

under certain conditions, it's possible to deal with negative externalities without government interference

What are natural barriers to entry caused by?

very high fixed costs

What is a nonrival good?

when consumed, availability does not change (ex: radio, lighthouse)

What is a rival good?

when consumed, the level of availability decreases (ex: car)

In a monopoly market, do firms have pricing power?

yes

Is price discrimination legal?

yes

What are the main features of a monopoly?

- One firm - Barriers to entry - Pricing power