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