econ exam 4

What is, positive vs. negative externality?

-A positive externality (also called "external benefit" or "external economy" or "beneficial externality") is the positive effect an activity imposes on an unrelated third party. Similar to a negative externality, it can arise either on the production side, or on the consumption side. -The difference between a positive externality and a negative externality is that the former has good effects on people while the latter has bad effects. An externality occurs when an economic action takes place and has an effect on people who are not directly part of the action. ... I am not part of this economic action

What are features of Monopolistic competition?

-Product differentiation. -Many firms. -Freedom of Entry and Exit. -Independent decision making. -Some degree of market power. -Buyers and sellers do not have perfect information (Imperfect Information) -One Seller and Large Number of Buyers: The monopolist's firm is the only firm; it is an industry. ... -No Close Substitutes: There shall not be any close substitutes for the product sold by the monopolist. ... -Difficulty of Entry of New Firms: ... -Monopoly is also an Industry: ... -Price Maker:

What is industry concentration ratio?

A concentration ratio is the ratio of the combined market shares of a given number of firms to the whole market size. It is commonest to consider the 3-firm, 4-firm or 5-firm concentration ratio. Concentration ratios are used to assess the extent to which a given market is oligopolistic.

Why is advertising important in monopolistic competition?

ADVERTISING: Advertising is commonly used by firms operating under monopolistic competition as a way to create product differentiation and thus to acquire some degree of market control and thus charge a higher price. ... Moreover, with product differentiation comes market control.

What is a cartel?

Cartels. A cartel is a grouping of producers that work together to protect their interests. ... In this case cartels are also called price rings. They can also restrict output released onto the market, such as with OPEC and oil production quotas, and set rules governing other aspects of the behaviour of members.

What is private vs. public good?

Economists define a public good as being non rival and non excludable. The non rival part of this definition means that my consumption does not affect your consumption of a good; I do not "use it up". -A private good is a product that must be purchased to be consumed, and its consumption by one individual prevents another individual from consuming it. Economists refer to private goods as rivalrous and excludable.

What is the Nash equilibrium in the prisoners' dilemma?

Eliminating all dominated strategies, in order to get the dominant strategy, can solve this game. This is, each prisoner will analyse their best strategy given the other prisoner's possible strategies. Prisoner 1 (P1) has to build a belief about what choice P2 is going to make, in order to choose the best strategy. If P2 confesses (P2C), he will get either -8 or 0, and if he lies (P2L) he will get either -10 or -1. It can be easily seen that P2 will choose to confess, since he will be better off. Therefore, P1 must choose the best strategy given that P2 will choose to confess: P1 can either confess (P1C, which pays -8) or lie (P1L, which pays -10). The rational thing to do for P1 is to confess. Proceeding inversely, we analyse the beliefs of P2 about P1's strategies, which gets us to the same point: the rational thing to do for P2 is to confess. Therefore, "to confess" is the dominant strategy. P1C, P2C is the Nash equilibrium in this game (underlined in red), since it is the set of strategies that maximise each prisoner's utility given the other prisoner's strategy. Nash equilibriums can be used to predict the outcome of finite games, whenever such equilibrium exists. On the downside, we find the issue that arises when dealing with a Nash equilibrium that is neither social nor ethical, and where efficiency may be subjective, which is the case in the prisoner's dilemma, where the Nash equilibrium does not meet the criteria for being Pareto optimal (underlined in green).

What are barriers to entry in oligopoly?

Entry barriers (or barriers to entry) are obstacles that stop or prevent the entrance of a firm in a specific market. It is associated with the situation in which a firm wants to enter a market due to high profits or increasing demand but cannot do so because of these barriers.

What is excludable vs. nonexcludable good?

Excludability. In economics, a good or service is called excludable if it is possible to prevent people (consumers) who have not paid for it from having access to it. By comparison, a good or service is non-excludable if non-paying consumers cannot be prevented from accessing it.

What is market failure in negative externality?

Externalities, or consequences of an economic activity, lead to market failure because a product or service's price equilibrium does not accurately reflect the true costs and benefits of that product or service. Equilibrium, which represents the ideal balance between buyers' benefits and producers' costs, is supposed to result in the optimal level of productionWhen negative externalities are present, it means that the producer does not bear all costs, resulting in excess production. An example of a negative externality is a factory that produces widgets but pollutes the environment in the process. The cost of the pollution is not borne by the factory, but instead shared by society. If the negative externality is taken into account, then the cost of the widget would be higher. This would result in decreased production and a more efficient equilibrium. In this case, the market failure would be too much production and a price that didn't match the true cost of production, as well as high levels of pollution.

What is game theory?

Game theory is "the study of mathematical models of conflict and cooperation between intelligent rational decision-makers". Game theory is mainly used in economics, political science, and psychology, as well as in logic and computer science. ... Game theory has been widely recognized as an important tool in many fields.

What is excess capacity in monopolistic competition?

Ideal output is the output at which long-run average cost is minimum. Therefore, the firm is producing MN less than the ideal output. Thus MN output represents the excess capacity which emerges under monopolistic competition. It is worth nothing that the concept of excess capacity refers only to the long run.

What is internalizing externality?

Image result for What is internalizing externality? The market-driven approach to correcting externalities is to "internalize" third party costs and benefits, for example, by requiring a polluter to repair any damage caused. But in many cases, internalizing costs or benefits is not feasible, especially if the true monetary values cannot be determined.

What is market failure?

Image result for What is market failure?www.tutor2u.net In economics, market failure is a situation in which the allocation of goods and services is not efficient, often leading to a net social welfare loss. ... Market failures are often associated with time-inconsistent preferences, information asymmetries, non-competitive markets, principal-agent problems, or externalities.

What is common pool problem?

In economics, a common-pool resource (CPR) is a type of good consisting of a natural or human-made resource system (e.g. an irrigation system or fishing grounds), whose size or characteristics makes it costly, but not impossible, to exclude potential beneficiaries from obtaining benefits from its use.

What is rival vs. non-rival good?

In more general terms, almost all private goods are rivalrous. In contrast, non-rival goods may be consumed by one consumer without preventing simultaneous consumption by others. Most examples of non-rival goods are intangible.

What economic profit would a monopoly firm make in the long run?

In the long-run, the demand curve of a firm in a monopolistic competitive market will shift so that it is tangent to the firm's average total cost curve. As a result, this will make it impossible for the firm to make economic profit; it will only be able to break even.

What is free rider problem?

It is a market failure that occurs when people take advantage of being able to use a common resource, or collective good, without paying for it, as is the case when citizens of a country utilize public goods without paying their fair share in taxes.

How is the market affected when the buyer has extra information?

Many economic transactions are made in a situation of imperfect information, where either the buyer, the seller, or both, are less than 100% certain about the qualities of what is being bought and sold. Also, the transaction may be characterized by asymmetric information, in which one party has more information than the other regarding the economic transaction. Let's begin with some examples of how imperfect information complicates transactions in goods, labor, and financial capital markets. The presence of imperfect information can easily cause a decline in prices or quantities of products sold. However, buyers and sellers also have incentives to create mechanisms that will allow them to make mutually beneficial transactions even in the face of imperfect information. more info

What is shape of a firm's demand curve & MR curve in Monopolistic competition?

Market Power. The demand curve for an individual firm is downward sloping in monopolistic competition, in contrast to perfect competition where the firm's individual demand curve is perfectly elastic.

What is shape of a firm's demand curve & MR curve in Oligopoly

Market Power. The demand curve for an individual firm is downward sloping in monopolistic competition, in contrast to perfect competition where the firm's individual demand curve is perfectly elastic.

What is the difference between adverse selection and moral hazard?

Moral Hazard vs Adverse Selection. ... Adverse selection occurs when there's a lack of symmetric information prior to a deal between a buyer and a seller, whereas moral hazard occurs when there is asymmetric information between two parties and change in behavior of one party after a deal is struck.

What is moral hazard? For example?

Moral hazard is a situation in which one party to an agreement engages in risky behavior or fails to act in good faith because it knows the other party bears any consequences of that behavior. ... In the business world, common -For example, a driver with an auto insurance policy that provides full coverage, accident forgiveness and no deductible may exercise less care while driving than someone with no insurance or a less generous policy, because the first driver knows the insurance company, not him, pays 100% of the costs if he has an accident. In the business world, common examples of moral hazard include government bailouts and salesperson compensation.

What is price leadership theory?

Price leadership is when a leading firm in its sector determines the price of goods or services. This can leave the leader's rivals with little choice but to follow its lead and match the prices if they are to hold onto their market share.

What is profit maximization principle in these markets?

Profit Maximization. The monopolist's profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output.

What is market failure with public goods?

Public goods provide an example of market failure resulting from missing markets

What is strategic interdependence in oligopoly?

The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore, the competing firms will be aware of a firm's market actions and will respond appropriately.

What is kinked demand theory?

The kinked‐demand theory is illustrated in Figure and applies to oligopolistic markets where each firm sells a differentiated product. According to the kinked‐demand theory, each firm will face two market demand curves for its product. At high prices, the firm faces the relatively elastic market demand curve,

What are features of Oligopoly?

The three most important characteristics of oligopoly are: (1) an industry dominated by a small number of large firms, (2) firms sell either identical or differentiated products, and (3) the industry has significant barriers to entry.

What is socially optimum output?

When output occurs at the intersection of marginal social benefit (MSB) and marginal social cost (MSC), the socially optimal level of output is achieved. Also known as the allocatively efficient level of output. If output occurs at any other level, a market failure exists.

What is market failure in positive externality?

With positive externalities, the buyer does not get all the benefits of the good, resulting in decreased production. need more info

What is asymmetric information?

also known as information failure, occurs when one party to an economic transaction possesses greater material knowledge than the other party. ... Almost all economic transactions involve information asymmetries. -In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. ... Information asymmetry is in contrast to perfect information, which is a key assumption in neo-classical economics.

What is externality?

an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. Economists often urge governments to adopt policies that "internalize" an externality, so that costs and benefits will affect mainly parties who choose to incur them.

What is Coase theorem? When would it work?

he Coase theorem (/ˈkoʊs/) describes the economic efficiency of an economic allocation or outcome in the presence of externalities. ... In practice, obstacles to bargaining or poorly defined property rights can prevent Coasian bargaining.

What is adverse selection? For example?

refers generally to a situation where sellers have information that buyers do not have, or vice versa, about some aspect of product quality. In the case of insurance, adverse selection is the tendency of those in dangerous jobs or high-risk lifestyles to get life insurance. -in the Insurance Industry. ... In the insurance industry, adverse selection refers to situations in which an insurance company extends insurance coverage to an applicant whose actual risk is substantially higher than the risk known by the insurance company