Micro concept Q's

oligopoly characteristics

-few firms -barriers to entry -often no product differentiation

second degree price discrimination

-firm has market power -firm can prevent re-sale -customers differ in their demand curve -cannot segment the market - it offers different pricing options and lets customers pick

first degree discrimination requirments

-firm has market power -firm can prevent re-sale -customers differ in their demand curves -can identify each customers max willingness

How does a monopoly arise?

-innovation -patents -extreme increasing returns to scale (utilities, gas, postal service) -strong arm tactics

The slope of the budget line is...

-w/Px

profit equals 0 in the short run under if what two curve equal one another?

If P* is equal to the min of the ATC curve

A positive externality is shown by a marginal social benefit (MSB) curve that is

above and to the right of the demand curve for the good that generates it.

An increase in technology that enhances labor productivity will likely result in...

an increase in labor employment and an increase in the wage rate

Isoquants that are L shaped means L and K

are not able to be substituted

Suppose a graph showing the marginal external cost curve and marginal cost of abatement curve of emissions indicates that an emissions fee of $10/unit will lead to the optimal level of emissions. If the government sets an emissions fee of $5/unit, emissions will

be above the optimal level, but will be curtailed relative to the level that would arise with no fee.

Monopolies cause deadweight loss bc...

consumer surplus is lost

With increasing returns to scale, long run average costs...

decrease as the firm scales up (5)

In a decreasing cost industry the input prices...

decrease as the industry grows

If the firm is on the upward part of the LRAC curve then it is facing...

decreasing returns to scale, it should scale down

Tradable emissions permits, first you ...

determine the optimal market level of emissions rather than figure out each individual firms q* P*

Intertemporal price discrimination

different prices at different points in time (includes peak-loading pricing)

To third degree price discriminate the firm...

divides the market into the "inelastic demanders" and the "elastic demanders", then use monopoly pricing

On the backward bending portion of the labor supply function the income effect...

dominates the substitution effect

Nash equilibrium and how it relates to oligopoly

each firms decision is optimal conditional on its competitors decisions. This is the equilibrium point for oligopolies

If the producer surplus in the combined market is less than the segmented producer surpluses added together...

engage in 3rd price discrimination

A monopolist that charges each customer the max price that the customer is willing to pay is

engaging in perfect price discrimination

To find the equilibrium price of a monopsony...

equate ME and MV, then read down to the supply curve to find P*

to find its profit maximizing output level, a pure monopolist will...

equate MR and M

To find profit max point for monopolists...

equate MR and MC, then read up to demand curve to find price

at a low wage, substitution effect is likely to dominate for...

everyone

a firm should always hire more labor when the marginal revenue product of labor

exceeds the wage rate

As a rule, peak-load pricing is much more desirable when the MC of production is

high at the peak-load quantity relative to its level at the off-peak quantity

people who want theater and opera tickets are examples of....

intertemporal price discrimination

if a firm is able to participate in perfect price discrimination than the MR curve...

is the Demand curve

Given that Ronit is risk neutral, for any situation where I=E(I)..

it must be the case that U(I)=E(U). (4)

Given that Anil is risk averse, for any situation where I=E(I)...

it must be the case that U(I)>E(U). (4)

only thing that is variable in the short run?

labor

Which of the following causes a firms long run demand curve for labor to relatively elastic?

labor and capital are relatively close substitutes

The short run demand for labor curve is ____elastic than the long-run demand for labor curve. Why?

less elastic bc K is fixed in the short run so the firm has no ability to substitute K for L

Monopsony effects on quantity and price...

lower price and less quantity sold

If p* is below min AVC then...

the firm will not produce

To achieve the optimal level of emissions, a government could set an emissions standard at the quantity

where the marginal external benefit curve intersects the marginal cost of abatement curve.

Monopsony causes deadweight loss bc...

you lose producer surplus

monopolistic competition characteristics

-many firms -free entry/exit -product differentiation -face downward sloping D not a price taker--> monopolistic

For a monopoly, the TR is maxed when MR=

0

Total cost always exceeds variable cost?

As long as FC>0 (6)

How does a monopsony arise?

Be a large (and/or specialized) company in the output market, and thereby the only buyer of particular input (NASA, Boeing, Company towns)

Nonrival

Can be supplied to additional consumers at zero marginal cost

Lerner Index

L=(P-MC)/P

Another way of writing P*=MC for short run demand for labor is...

MRPlabor=w*

The monopolist operates on the same scale...

as the entire perfectly competitive market

Companies that are granted monopoly power and then regulated are...

natural monopolies

If a decline in the wage rate causes every firm in a market to hire more labor

-mkt supply curve for outpout will increase -equilibrium price of output will decrease -every firms marginal revnue product of labor curve will decrease -the typical firm will end up hiring less labor than it would if it were only firm facing the lower wage

substitution effect for complements is

0

coupons/quantity discounts is an example of what type of price discrimination

2nd degree

The monopsonists supply curve is equal to the...

Average expenditure curve

Coles coal company is the only employer in a remote region, so the firm is a monopsony buyer of labor in the market. If local population declines and there are fewer qualified coal miners available, which one of the curves used to determine the monopsony outcome in this market shifts?

Average expenditure curve and marginal expenditure curve

Marginal revenue is always less than...

Average revenue because to sell the additional output the monopolist lowers the price on all units of output sold

Marginal revenue product of labor equation=

Change in TR/Change in L

Two part tariffs

Charge a (fixed) "entry fee" plus a (variable) user fee

Whenever average fixed cost is decreasing with output, MC must be decreasing with output

False: Average fixed cost is always decreasing with output, MC increases past a point

A firm should shut down in the short run if P* is below what?

If P* (MR) is below the minimum of the AVC curve than it should shut down bc producing nothing is less costly

Rival goods

If i buy it, you cannot

When the LRAC curve is decreasing, what returns to scale are you facing?

Increasing

ATC is minimized when

MC equals ATC

MRTS=

MPL/MPK

In perfect competition P* is also equal to..

MR and AR

in the short run the firm should pick the q* that equates what? and only if what?

MR=MC only if MC is rising

MUX/PX =

MUY/PY (where MUX is the marginal utility of X).

private costs exclude what?

Marginal external costs-costs imposed on third partiers due to pollution

Should a firm shutdown always if the P* (MR curve) is below the minimum of the ATC curve?

No bc shutting down would cause an even bigger loss of profit. If it is above the min AVC than it should keep producing

Which of the following is a negative externality connected to attending college?

Other college students play loud music when you are trying to sleep.

MRS=

PX/PY

MRPL=

P·MPL

Marginal social cost=?

S+MEC (msc=s + mec at firm level)

The monopolists MR curve is derived from...

TR curve

Suppose that the marginal cost of an additional ton of steel produced by a firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater than it is in Japan (that is, foreign consumers are more responsive to price changes), which of the following is an expected outcome?

The Japanese firm will charge a lower price abroad than in Japan

short run supply curve is what?

The MC above the minimum AVC point

If just price changes then you move along

The short run supply curve

we know MRTS L for K is the absolute value of...

The slope at Point A if the isoquant is tangent to the isocost line so they both have the same slope

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing

Third degree price discrimination

As output increases, average variable costs and average total cost converge?

True bc Average FC decreases as input increases so they converge

Whenever MC is decreasing with output, average variable cost must also be decreasing with output?

True, as long as q2>q1 (see graph in 6)

the short run supply curve s shifts when?

When w falls and when w increases

Negative externality

a cost that affects neither the buyer nor the seller is not brought to bear in establishing the market price

if the market for widgets is suddenly monopolized, we should expect...

a decrease in consumer surplus in the widget market

in the personal computer market, some large manufacturers are able to buy computer components at lower prices than smaller firms in the market...this outcome indicates that the large firms have...

a degree of monopsony power

L>0 simply indicates...

a departure from perfect competition

A box of corn flakes is

a rival good because if Buyer 1 buys the box, then Buyer 2 cannot consume it.

a two part tariff refers to...

a two part policy designed to extract CS. Firm charges a fixed entry fee plus a variable usage fee

Long run equillibrium means that every firm is...

at the min of the LRAC curve, there is no desire to scale up or down. Every firm is making 0 profit

Marginal expenditure will always lie above...

average expenditure because the monopsonist must pay a higher price for all units of lumber when it increases its purchase

Negative externality makes the price...

be to low and to much will be bought and sold

Third degree price discrmination

charge different prices for different types of customers (aka segmentation)

First degree price discrimination

charge the "max willingness to pay for each unit sold (perfect price discrimination)

For a two part tariff imposed on two consumers, the entry fee should always be based on the

consumer surplus of the customer with lower willingness to pay

A firm planning to engage in third degree price discrimination (market segmentation) must face each of the following conditions except

consumers that differ in their willingness to pay or own price elasticities of demand

When emissions are measured on the horizontal axis, the marginal cost of abating emissions is

downward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain.

In a monopolized market you can expect prices and quantities to be...

higher prices, less quantity sold

compared to the equilibrium price and quanity sold in a competitive market, a pure monopolist will charge a ____ price and sell a ____ quantity

higher; smaller

an increase in MC will always lead to a decrease in and increase in

in the profit-maximizing output level and, in turn, an increase in price

the goal of peak load pricing is to

incentivize consumers to shift demand to off-peak times

With decreasing returns to scale, long run average costs...

increase as the firms scales up (5)

If a workers wage decreases, the substitution effect will

increase leisure, regardless of whether leisure is a normal or inferior good

If a worker views leisure as a normal good, then the income effect assoicated with a wage decrease will

increase the number of hours worked

If a firm is scaling up then what are they doing?

increasing capital and moving to the min of the LRAC curve

Private benefits exclude what?

marginal external benefits-benefits accruing to third parties

a firm operating in a perfectly competitive output market has a downward sloping short-run demand curve for labor because

marginal product of labor decreases as more labor is hired

the equilibrium price is above the Marginal cost. This is a sign of...

monopoly power

When compared to the demand curve for only one variable input, the demand curve for a factor input when several inputs are variable is

more elastic

Public goods two characteristics

non-rival and non-exclusive

What type of good is clean air?

nonrival and nonexclusive

The optimum level of pollution emissions

occurs where the marginal external cost equals the marginal cost of abatement.

Second degree price discrimination

offer customers different pricing options (aka indirect price discrimination; includes quantity discounts)

When a firm scales up then it is jumping from...

one SRSC to another SRSC

Unlike a firm buying a particular factor of production in a perfectly competitive market, a pure monopsonist ...

pays a price equal to its marginal value for the last unit purchased

perfect competition faces what type of elasticity as far as MR/P* curve?

perfectly elastic

Example of negative externalities

pollution

economic efficiency

refers to the market outcome that maxes social welfare

risk premium only applies to...

risk averse people

Private goods are

rival and exclusive

monopoly power results from the ability to

set price above marginal cost

Imposing a tax does what to the supply curve?

shifts it up by the amount of the tax

in an increasing cost industry the LRAC curve... and the equilibrium market price is...

shifts up, higher

in the short run the Marginal revenue product of labor is equal to...

short run demand curve for labor

MPL's slope equal to...

slope of the short-run production function (5)

If your isoquant line is relatively uncurved than which effect is large?

substitution

The more substitutable are L and K, the bigger is the..

substitution effect (L1to L′) and, all else equal, the bigger is the total reduction in L (L1 to L2)

define: social welfare

sum of consumer and producer surplus

The monopolists MC curve is identical to the competitive markets...

supply curve S

In a monopsony the P* is always less than...

the Marginal Valuation (MV)

MRTS of L for K is..

the absolute value of the slope of a production isoquant (5)

Define Producer surplus

the amount of revenue received by a firm minus the amount of revenue the firm would require to produce that particular quantity

when the marginal product of labor or the output price increases...

the demand for labor increases

The process of dry cleaning clothing produces air pollutants. Therefore, in the market for dry cleaning service

the equilibrium price is below its socially optimal level, while the equilibrium quantity is above its socially optimal level.

4. b) The curvature of the production isoquant determines

the extent to which K and L are substitutable

if a workers supply curve is backward bending then...

the income effect associated with a higher wage is greater than the substitution effect

Marginal revenue product of labor is

the increment to revenue associated with the increment to L. =MRxMPlabor

the quantity response to a wage increase depends on

the price elasticity of the (output) demand curve

the pure monopolist has no supply curve bc...

the quantity supplied at any particular price depends on the market demand curve

To figure out how much to produce the firm looks at..

the short run supply curve

In perfect competition, marginal revenue is equal to ...

the slope of TR curve and Average Reveue

APL's slope equal to

the slope of a ray drawn from the origin to the short run production function

The short-run demand curve (SR dL or MRPL) is less elastic than the long-run demand curve (LR dL) because

the substitution effect is zero in the short-run

Social welfare

the sum of consumer and producer surplus

Producer surplus

the total revenue collected by all producers in the market for X* units of the good, net the minimum revenue that would make producers willing to produce X*

the magnitude of the sub. effect and the scale effect determine

the wage-elasticity of the long run demand for labor curve

Positive externality makes the price be...

to high and to little will be bought and sold

If the substitution effect always dominates the income effect, his labor supply curve is always

upward sloping

Producer surplus is also referred to as ...

variable profit

Producer and consumer surplus under perfect price discrimination..

-CS=0 -PS= as large as it can be -social welfare is maxed

Monopolist has "power" where "power" might mean

-Face demand curve that is not perfectly elastic -P*>MC at optimum -Positive profit even in long run

Demand for labor in the short run assumptions

-PC market -firm only uses L and K -K is fixed in the short run -each unit of L is the same -w* represents wage

Cournot model characteristics

-all firms in the oligopolistic market sell an identical product -firms choose the quantity to produce -firms choose their optimal quantity simultaneously -all goods will then sell for the same P*(dictated by market demand curve)

some degree of market power exists if the firm...

-can influence the price -can maintain a positive profit in the long run

key points about monopolistic competition

-each firms unique product gives it monopoly power over its share of the market -as more firms enter, each firms share of the market shrinks (demand shifts in and becomes more elastic) -firms continue to enter as long as there are profits to be made -equilibrium is reached when each firm makes zero profit -inefficient and therefore creates DWL

two part tariff conditions

-firm has market power -firm can prevent re-sale -there need not be different types of consumers -no need to identify the types of consumers pre purchase or have them self-identify

peak load pricing requirements

-firm has market power -no resell -customers need not differ from one another, but as a group they demand more of the product at some (predictable) times than at others

intertemporal price discrimination

-firm has market power -product is used when it is purchased -customers differ in their demand curves -firm segments the market by setting different prices at different times

third degree price discrimination conditions

-firm must have market power -prevent resale -customers differ in their demand curves -firm cannot identify each customers reservation price pre-purchase but it CAN place consumers into groups pre-purchase. groups them by price elasticity of demand and/or willingness to pay

what is the value of the Lerner index under perfect competition?

0

A risk neutral person would pay a risk premium of...

0 always mofo!

in perfect competition what is the Lerner index and why?

0 bc P*=MC

When given enough time (in the long run) four types of adjustments can be made...

1. Acquire more K (scale up) 2.Get ride of K (scale down) 3. get rid of all k (exit market) 4. Acquire k (enter market)

Shape of LRMSC in a 1. Constant cost industry 2. increasing cost industry 3. decreasing cost industry

1. horizontal 2. upward sloping 3. downward sloping

how do you derive the short run demand for labor?

portion under the Marginal product of labor curve after the max of Average product

The monopolists MC curve will approximate...

the industry SR supply curve

if the equilibrium is an interior solution for labor supply than at the equilibrium point MRS=

w/p

A firm will make a negative profit in the short run if...?

The Price (aka MR) falls below the minimum of the ATC curve

APL is maxed in the short run where?

The point where the ray drawn from the origin is tangent to the function or, stated differently, steeper than any alternative ray drawn from the origin to the function. APL=MPL at this point (5)a

Monopsonists invariably operate in...

input markets

If the firm is on the downward part of the LRAC curve then it is facing...

increasing returns to scale and it should scale up

the marginal revenue product of labor can be expressed as the

increment to revenue recieved from one additional unit of input hired

non-exclusive

individuals cannot be excluded from consuming the good.

To find the social marginal benefit of public goods, one needs to

sum the consumers' demand curves vertically.

to find the market demand curve for a public good...

sum the individual consumers demand curves vertically

For non-public goods you obtain the market demand curve by...

summing the individual consumers demand curves horizontally

define consumer surplus

the total willingness on the part of all consumer in the market to pay for X* units of a good, net of what they actually pay for those X* units