question
Predatory pricing analysis
answer
Firm charges a price that is below its own MC in an attempt to drive a rival out of business
question
Why U.S. govt is reluctant to enforce laws against predator pricing
answer
Looks like they favor higher prices
Promotes inefficiency
International relations may sour
Difficult to prove
Promotes inefficiency
International relations may sour
Difficult to prove
question
Cautions of predatory pricing
answer
Illegal in U.S. and most countries
Risk - predator could become the prey
- when done, this causes loss
- firm w/ the most money wins
Risk - predator could become the prey
- when done, this causes loss
- firm w/ the most money wins
question
Rent seeking
answer
Selfishly motivated efforts to influence another party's decision
question
Price match definition
answer
Firms advertise promise to match a lower price from a competitor - "low price guarantee"
question
Price match strategy
answer
- Consumers feel they are getting a good price
- if all firms have this policy, cannot find a lower price
- no incentive to lower price
- no change in market share
- results in price war
- if all firms have this policy, cannot find a lower price
- no incentive to lower price
- no change in market share
- results in price war
question
Penetration pricing
answer
a firm charges a low price to gain a critical mass of consumers
question
Externality
answer
Socially efficient output
MCsociety = P
Output under P.C.
MCinternal = P
Output under monopoly
MR = MCinternal
MCsociety = P
Output under P.C.
MCinternal = P
Output under monopoly
MR = MCinternal
question
Profit maximizing price, given MC and price elasticity
answer
P = [E/(1+E)] MC
question
Oligopolistic industry - market elasticity of demand and profit-maximizing markup factor
Influences on markups for oligopolies
Influences on markups for oligopolies
answer
P = [NEm/(1+NEm)] MC
Smaller markup factor
- more elastic, more firms, price is closer to MC
Higher MC, higher price
Smaller markup factor
- more elastic, more firms, price is closer to MC
Higher MC, higher price
question
Outcome under Bertrand Oligopoly - given demand and cost functions
answer
Output is the same as under PC
MR = P = MC
MR = P = MC
question
Sweezy model of Oligopoly
answer
Sticky price: prices that stays constant for extended periods
Inelastic demand BELOW sticky price
- P goes down, TR goes down
Elastic demand ABOVE sticky price
- P goes up, TR goes down
Inelastic demand BELOW sticky price
- P goes down, TR goes down
Elastic demand ABOVE sticky price
- P goes up, TR goes down
question
Contestable market conditions
answer
- All producers have access to the same technology
- Consumers respond to price changes
- Existing firms CANNOT quickly lower higher prices
- No sunk costs
- Consumers respond to price changes
- Existing firms CANNOT quickly lower higher prices
- No sunk costs
question
Contestable market outcomes
answer
If there is an economic profit
- firms will enter under the industry and this will continue until economic profit = 0
If market is contestable
- economic profit = 0
- firms will premiere where MC = P
- firms will enter under the industry and this will continue until economic profit = 0
If market is contestable
- economic profit = 0
- firms will premiere where MC = P
question
Strategic decision involving marginal benefits and marginal costs
answer
MB > (or equal to) MC
question
Income elasticity of demand calculation
answer
(% change in Qd) / (% change in income)
question
Optimal input usage - wage and VMPL
answer
VMPL = MPL * P
MPL = difference of quantity when producing an additional unit
Continue if VMPL > (or equal to) wage
MPL = difference of quantity when producing an additional unit
Continue if VMPL > (or equal to) wage
question
Input usage
answer
MPL/w vs MPK/r
Greater MPL/w - use more labor
Greater MPK/r - use more capital
Greater MPL/w - use more labor
Greater MPK/r - use more capital
question
Profit-maximizing price determination given inverse demand function and cost function
answer
Output under monopoly
MR = MCinternal
MR = MCinternal
question
Calculation of AVC
answer
...
question
Shut down rule
answer
STAY OPEN if:
TR > TVC
P > AVC
TR > TVC
P > AVC
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