Econ 202 Final
How does perfect competitor maximize profit?
- (MR=MC) - Marginal Revenue = Marginal Cost - Under or over q* is not maximizing profit
Characteristics of a Monopoly
- Firm is price setter - No close substitutes - Barriers to entry (Legal Monopoly) - Prices are higher v. competitive markets - Illegal under federal law - Copyrights and patents are the exception
Characteristics of Perfect Competiton
- Firm is price-taker (many firms have no power over price) - No barriers to entry (easy and low cost) - Product/service is homogeneous (its the same) - Consumers and producers are well informed about the product, service, and competition
Nash Equilibrium
- Optimal outcome of a game is where there is no incentive to deviate from their initial strategy - Optimal outcome of a game is where no player has an incentive to deviate from his chosen strategy after considering an opponet's choice
Attributes of Cartels
- Small # of firms dominate the industry - Prices and production quantities are fixed - Product is undifferentiated
Some reasons Microsoft might be considered a monopoly:
- Uncompetitive practices - Operating systems and software - Market run on intel chips - Netscape and Explorer - Tying/bundling products - Set prices for users - Web browser
What was the outcome of the Prisoner's Dilemma?
2 individuals acted in their own self-interest and did not result in the optimal outcome
A group of firms that has entered into an agreement to restrict output and increase prices and profit is called
A Cartel
Duopoly
A two-firm oligopoly
Prisoner's Dilemma is
An example of a duopoly game
A firm faces a small number of competitors. This firm is competing in
An oligopoly
How is a firm in an oligopoly similar to a monopoly?
Both types of firms operate behind natural or legal barriers to entry
Firms in an Oligopoly
Can each influence the market price
A group of firms acting together to limit output, raise price, and increase economic profit is called a
Cartel
Game theory is the tool that economists use to anlayze strategic behavior, which is behavior that takes into account the _____ behavior of others and the mutual recognition of_____.
Expected; Interdependence
A tool that allows economists to analyze the strategic behavior of firms is
Game Theory
The possible alternatives for an oligopoly range from the monopoly case with _____ to the perfectly competitive case with ______.
Low output; High output
If firms in an oligopoly look only at their own self interest in deciding the output they should produce, the total market output will exceed that of a
Monopoly
When firms in an oligopoly successfully collude and do not cheat on a cartel agreement, they achieve long run economic profit similar to
Monopoly
Long-run economic profits are most likely to be earned in
Monopoly and oligopoly
A Nash Equilibrium
Occurs when each player chooses the best strategy given the strategy of the other player
Game theory is used to analyze the interactions among firms in_____.
Oligopoly
A cartel is most likely to occur in
Oligopoly as firms act together to raise prices and increase profits
Price Discrimination
The action of selling the same product at different prices to different buyers in order to maximize sales and profits
Economists use game theory to analyze strategic behavior, which takes into account
The expected behavior of others and the recognition of mutual interdependence
Major Dilemma Facing Boeing and Airbus is
The fact that if each firm separately tries to maximize its profit, it might wind up with less profit than otherwise
Normal Profit
When the difference between a firm's total revenue and total cost is equal to zero
In a Prisoner's Dilemma game, in the Nash equilibrium,
neither player gets his or her best outcome
