ECON 102 Final Exam Slides, HW, Quiz, & Supplements

Obviously horizontal mergers are buying your _____ which hurts competition

competitors

Area between the demand curve and price

consumer surplus

Difference between what the consumer is willing to pay and the actual price they pay

consumer surplus

The difference between the total amount that consumers would have been willing to pay for an item and the total amount that they actually pay

consumer surplus

Forgone surplus

deadweight loss

Occurs as a result of fewer trades

deadweight loss

At a nonbinding price floor, equilibrium price is

still legal

PC: On the long run equilibrium graph, there are _____

0 economic profits P = min(ATC)

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

MR=MC

If a type of customer is elastic, then what kind of price should you charge them?

low price, ex: college students

Perfect Competition Graph: Price equals... You increase quantity until... Price is determined by the

marginal revenue MR=MC market

ATC formula

well, not a formula, it's just the point above the MR=MC point

What is allocative efficiency?

when the last unit produced where P=MC any inefficiency will create DWL

The total profit earned by the monopolist is shown by

where ATC point is it's top left

Difference between a firm shutting down and exiting the industry?

shutdown- chair prices are too low and you'll lose money if you sell at higher because no one will buy at your high price, so you shut down at the moment

price discrimination

the business practice of selling the same good at different prices to different customers

A vertical merger involves

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

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

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?

Entry barriers in monopolistic competition can be created by existing firms as a way to keep inferior products out of the market

Why is there also price discrimination through bulk discounts?

it is easier for a firm to sell 100 units to one person than one unit to 100 people Also can, -acquire new customers -increase sales volume -make customers loyal

What does a larger coefficient on P(price) mean?

it means more elastic because for every dollar increase in price a lot more people are no longer buying Qd=100-5P

The perfectly competitive firm cannot influence the market price because

its production is too small to affect the market

The surplus consists of

Qd Qe and Qs

If economic profits are positive, what happens?

new firms enter the industry industry supply will increase (shift right) market price falls until economic profits are 0 if table business is doing well

Every firm along the supply chain takes their own _____ but if you own the whole chain then you keep all the profits

profits

If quantity demanded is less than quantity supplied, the result is a

surplus

Are monopolies ever desirable?

yes sometimes

Why would a firm still produce at a loss?

you'll lose less money

What is the profit if 50 units are sold at $75 and the average total cost of each unit at that quantity produced is $20?

π=q* x [ p* - ATC (q*) ] 50 x (75 - 20)= $2750

Breakeven price Shutdown price

P=ATC P<AVC

DWL exists because of

a binding price floor surpluses reduced number of trades

Perfect competition characteristics examples:

free entry perfect information homogenous goods many buyers and sellers: firms and price takers farms and stock market

DWL: Nonbinding price floor, where equilibrium price is still legal, correct amount of trade will occur so _____

DWL won't happen

To find the total profit earned by this monopolistically competitive firm,

use the π= q x [P- ATC] ATC is the point above the MR=MC point

5 entry barriers

-If you own all the resources, no one can enter -economies of scale -govt granted monopolies -predatory pricing -threats or sabotage

Common examples of price discrimination

-children's discount -veteran's discount -bulk discounts -Disneyworld or other theme parks have them -More used w services because they can't be resold

Why would a firm advertise? What are they trying to accomplish?

-increase demand -differentiate their product! ---there are plenty of pizza places, but this is why we are the BEST -result in increased profits -how much advertising should a firm do

What are the four characteristics of perfect competition?

-large number of buyers and sellers -homogenous product (perfect substitutes)- (every product needs to be the same to be competitive) -perfect information of price -no barriers to entry or exit

3 conditions for long run equilibrium of a perfectly competitive firm:

1. Each firm is maximizing its profits. Each firm chooses q*. Condition 1 just says that firms will produce the level of output Q such that P = MR = MC. (we are still looking at a perfectly competitive analysis) 2. The economic profit that each firm is making is equal to zero. 3. All firms are content to stay in (or out of) the industry. Conditions 2 and 3 imply that price is equal to the minimum ATC of each firm --P = min(ATC) for each firm

What is required to be able to price discriminate?

1. you must have market power --can't be done in pc market 2. customers must have different valuations of the product --what would people pay for a hamburger? 3. No arbitrage: which is reselling the product at a higher price

A single-price monopolist can sell 4 units at price of $50 per unit and 5 units at a price of $45 per unit. The marginal revenue of the 5th unit is $______.

25 4(50)- 5(45)=

Which of the following situations is an example of price discrimination? Roger buys two different fish products: low quality fish sticks and high quality salmon. He pays two different prices for these two goods 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 Aaron loses his job so he eats at home more instead of going to restaurants Frank and Joey buy mozzarella and cheddar, and pay the same price for both products

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

I am willing to pay $20 for a Moe's burrito and Moe's is willing to sell that burrito for $5. If the price is $8 what is the CS and PS?

CS= WTP - Actual Price PS= WTS - Actual Price 12 3

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

Suppose the inverse demand function for a monopoly is given by P = 300 - 2Q. What is the firm's marginal revenue function?

MR = 300 - 4Q

A buyer's willingness to pay is $32 and the supplier's willingness to sell is $36. If the price is $35 does the trade happen?

No because there's no agreement

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

Marginal Analysis: -For the single price monopolist, the profit maximizing quantity is -Why doesn't the monopolist produce up to the point where the MC curve crosses the demand line? -

Q* which is found by locating the intersection MR = MC Because then the cost would be more than the revenue

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

Which of the following statements about the perfect competitor is INCORRECT? The perfectly competitive firm is always a price taker The perfect competitor sells a homogeneous commodity If an individual firm raises price, it will lose business The products made by a perfectly competitive firm have no close substitutes

The products made by a perfectly competitive firm have no close substitutes

Is this price discrimination? -The new iGadget is released at midnight tonight. Dave waits in line, buys it on the first day at a price of $500. Jaime waits a few months and buys it when the price is lowered to $349. -Kerry pays $3.49 for a Whopper at Burger King. Angie pays $3.89 for a Big Mac at McDonald's. -Peter is from Pennsylvania and Lois is from Louisiana. Both attend PSU. Peter pays in-state tuition of $10,000. Lois pays out-of-state tuition of $12,000. -Gas in Nebraska is $3.00 per gallon. Gas in Hawaii is $4.00 per gallon. -Nittany Golf Course charges $50 per round to play golf on weekends, but charges $35 per round to play golf on weekdays. -Mark and JoAnn go to the same restaurant. Mark pays $2 for a slice of cheese pizza. JoAnn pays $3 for a slice of supreme pizza. -Kyle and Stan both buy Frosted Flakes at Target. Kyle pays full price of $3.49. Stan uses a coupon and pays $2.99. -Penn Electric company charges higher electric rates during hot summer days and charges lower rates during cool nights.

Yes because sold by same firm No because sold by different firms, so different products Yes because sold by same firm No, the price difference is due to cost differences Yes, this is called intertemporal price discrimination, also seen at movie theaters No Yes, this is called hurdle pricing. Mail in rebates are another example. Maybe, this is called peak-load pricing, and may or may not be true price discrimination. It might be more costly at the margin to provide large amounts of electricity during hot weather.

Price floor

a minimum price for a good or service price can be at the price floor minimum, no lower, or above

These are all reasons DWL exists except... -a binding price floor -surpluses -a nonbinding price floor -reduced number of trades

a nonbinding price floor

Free entry meaning and examples

a person/company can enter and exit the market as they please starting a restaurant, starting a retail store, hair salon, landscaping company...

Surge pricing

a pricing strategy in which the price of a product is raised as demand for that product goes up and lowered as demand goes down this is when a firm raises prices because there is a large increase in demand we know from our supply and demand graphs that this is always the reaction to increases in demand EX: Uber's pricing is pretty much entirely based on the supply of drivers in an area and the demand for ubers

Consider a perfectly competitive market with demand and supply given as: Qd = 260 - 8P Qs = -20 + 2P Suppose a single firm in this perfectly competitive market has the marginal cost function of MC = 4Q. How many units of output will the single firm produce? Suppose that at this same firm's profit-maximizing level of output, average costs are ATC = $19. What are the firm's total profits earned?

a.) 7 Set both equations equal to each other and get p*=28 p=MC MR=MC so set 28=4Q and get Q=7 b.) 63 plug 19 7 and 28 into the π=q*[P*-ATC]

Consumer surplus on a graph is

above the market price (price floor) and below the demand curve

Deadweight loss on a graph

below price equilibrium, to the right of quantity demanded, and above supply curve

Surpluses start with the willingness of: -The buyers have a willingness to pay at a -The sellers have a willingness to sell at a -Both parties need to agree on a _____, otherwise they won't _____

both the buyers and sellers certain price certain price price, trade

Why would you price something higher than the competition and what is that called?

called pricing at a premium- Apple, Starbucks, Beats, Whole Foods Companies try to convince you their product is so much better and therefore justifies the higher price are Gucci flip flops actually better than your average pair? prob not

When firms agree to stop competing with each other and work together if they have enough of the share of a market, then they could all raise prices OPEC is the best example of this as they control a major amount of the oil supply they do need to worry about the US who is the largest oil producer and Russia who is not in OPEC either But still all together they control a large section of the oil market

cartels

Equation for welfare

consumer surplus + producer surplus

Based on the table shown, the four-firm concentration ratio in this industry equals what percentage of annual sales?

count up all the numbers that are different, don't count repeats and that sum is your percentage

PC: When firms enter, profits _____ When firms exit, profits _____ As long as firms are entering and exiting, we are not in ______ In perfect competition, we move toward _____ over time

decrease increase long run equilibrium zero economic profit

Graph with axes labeled price and quantity with Pf, Pe, Qd, Qe, Qs, D, and S: What does each look like?

demand curve going down supply curve going up Pf is the highest horizontal line Pe right under it In order on the horizontal axis is Qd Qe Qs Trace Qd and Qs up to Pf Trace Qe up to S and D intersection Trace Pe over to S and D intersection

Factors of monopolistic competition?

differentiated product advertising large number of sellers, competitive market easy entry for new firms --anyone can open up a sandwich shop if they wanted to

Why might the higher prices not be a bad thing?

differentiation costs money but it is nice to have choices

Price controls and policy: Price ceilings and floors both cause _____ and _____ also sometimes play a role

dwl politics and economics

Why do oligopolies exist?

economies of scale --larger factories can produce at lower ATC barriers to entry --i can't just go start up a car company the same way I can with a sandwich shop mergers

Entry barrier examples: -If you own all the resources, no one can -economies of scale: -govt granted monopolies: -predatory pricing: -threats or sabotage

enter monopolies and oligopolies- form because certain industries need to have high quantity patients, utilities, tariffs (trying to export or import when a country has a ban against you), qualities (lawyers-bars exam, med school requirements, drug company has patent for drug so no other company can make the drug) if the 2 Walmart's in State College drop prices to 0 so everyone goes to Walmart then slowly raise the prices if you open this shop, I will kill you

Economic profits will always go to 0 as long as firms can

enter and exit the industry

Price wants to be at

equilibrium

If economic profits are negative, what happens?

existing firms exit the industry industry supply will decrease (shift left) market price increases until economic profits are zero

Long Run Decisions For a Perfectly Competitive Firm: If firms are making negative profits, then existing firms will _____ Losses are a signal for the _____...The industry will _____ Market Supply shifts left and price will rise until profits are _____

exit exiting of firms contract (shrink) zero

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

firms can enter and leave the industry without serious impediments

Total Analysis: -TC will have a positive intercept if we are assuming the existence of ______ Case 1: If the TR function is parabolic, it means that this particular firm faces a _____ Case 2: In perfect competition, a single firm has a ______ demand function with constant MR, so TR will just be an ______ -Find the profits by _____. Profit is maximized where the gap between _____ is the biggest -Where TR=TC, profits are --Profit is maximized ____ -Tangent line on TR represent _____ -Tangent line on TC represents _____ -MR > MC means that TR is rising faster than ___ -MC > MR means that TC is rising faster than ___ -Maximum profit occurs at the _____

fixed costs downward sloping demand curve horizontal upward sloping line upward sloping line In either case, the profit max analysis is still the same TR-TC the gap between TR and TC 0 in between the two places where TR and TC intersect MR MC TC TR top of the hill on this bottom graph

With perfect competition, we have _____ Free entry means that anyone can _____ Thus, if the industry is profitable, new firms will enter. This increases _____ and decreases _____, lowering profits. If the industry is experiencing losses, firms will exit. This decreases _____ and increases _____, increasing profits for remaining firms.

free entry enter the industry in response to profit opportunities supply, prices exit supply, prices

Compared to perfect competition, monopolistic competition has...

higher prices, lower quantity, some DWL

What's perfect price discrimination?

if every customer paid exactly what they're willing to pay

What are network effects?

increases in the value of a product to each user, including existing users, as the total number of users rises

When economic profits are 0,

it doesn't mean you're making no money, you're doing good

What does product differentiation have to do with price? Why might you pay more for a Moe's burrito than a Taco bell burrito?

it gives firms some control over the price because they're not the same, and you have preferences on which one you like better

Advertising by monopolistically competitive firms can do all of the following EXCEPT lower the price of the good help differentiate a firm's product give the consumer information about the firm's products result in increased profits for the advertising firm

lower the price of the good

What are some examples of monopolistic competition firms and oligopoly firms?

monopolistic competition- pizza places, fast food, clothing stores, hair salons oligopolies- airlines, car manufactures, cereal, phone providers, media stations

To find the total revenue earned by a monopolistically competitive firm,

multiply price and quantity (the ones at the profit-maximizing point)

When both sides win, this is called _____

mutually beneficial voluntary trade

Is price discrimination associated with costs?

no

Entry barrier meaning and examples

not easy to enter and exit easily airlines, casinos, cruise lines, car manufacturers

Monopolies: One seller... MR function is...

one seller owns the whole market twice as steep as demand

What are the 4 market structures

perfect competition monopolistic competition oligopoly monopolies

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

positive

PC: Firm entry caused by

positive profits

When a firm sells different output units at different prices, for reasons that are NOT due to cost differences

price discrimination

Area between supply curve and price

producer surplus

Difference between marginal cost and price the good sold for

producer surplus

Long Run Decisions For a Perfectly Competitive Firm: In the long run, we now allow firms to enter and leave the industry in response to ______ If firms are making positive profits, then _____ Profits are a signal for the _____....The industry will ______ Market Supply shifts right and price will fall until profits are _____

profit opportunities new firms will enter entry of new firms expand zero

One problem associated with a monopoly firm is that it

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

Suppose the (inverse) demand function for a single-price monopoly is P = 800 - 3Q. This means that the marginal revenue function for the monopolist is MR = 800 - 6Q. Assume the marginal cost function is given by MC = 2Q. These functions are pictured above in Graph 2. Find the Q* that the monopoly will produce. Hint: Q* is found be setting MR = MC.

set MR equal to MC and get 100 500 plug 100 into the p equation

Suppose the (inverse) demand function for a single-price monopoly is P = 280 - 2Q. This means that the marginal revenue function for the monopolist is MR = 280 - 4Q. Assume the marginal cost function is given by MC = 3Q. Find the price that the monopolist will charge.

set mr mc = to each other ad get Q=40 plug that into p equation and get answer of 200

what is price skimming?

setting a high price for a new product to skim maximum revenues big in the tech industry when new things are always coming out LED HD TVs used to cost at least $2000 when they were very new Now you can get them under $500 because there is already newer and better stuff

Deadweight loss

surpluses that should have existed but didn't due to market distortion

Is it better to have more consumer surplus or producer surplus?

that's a normative question, so it's up for debate whatever gives the maximum amount of total surplus is better, no need to discriminate

What is market power? Examples?

the ability to alter/decide on the market price of a good or service Comcast, because in some areas they're the only provider available

Producer surplus on a graph

the area above the supply curve and below the price floor

If the four-firm concentration ratio for an industry is 84 percent, then each of the firms account for 21 percent of total sales the four largest firms in the industry account for 16 percent of the total sales The four largest firms in the industry account for 84 percent of the total sales the remaining firms after the four largest in the industry accounts for 84 percent of the total sales

the four largest firms in the industry account for 84 percent of the total sales

What are concentration ratios?

the percentage of the market output produced by the largest firms

Breakeven, P=minimum ATC

the price at which the firm will make zero profits. This price can be found by finding the price associated with the minimum of the average total costs (ATC). you can sell something without going into the negatives; costs $10 to make chair, you sell for $10

Shutdown price, P<AVC

the price below which the firm will choose to produce no output in the short run. Equal to minimum average variable cost. for every chair you make, it takes $8 to make. Chairs are only selling for $7, then you should shutdown.

Where is the profit maximized for a monopoly?

trace MR=MC point up to the demand curve and thats

Psychology pricing

when consumers evaluate goods they do not necessarily follow all economic assumptions leading to mental accounting, constructed preferences, differences in price perceptions because 19.99 looks better than $20 especially gas prices, they usually say $2.89 9/10...they break up one cent so it looks better