Intermediate Microeconomics Exam 2

any firm with market power that faces a downward sloping marginal revenue curve. Produces where MC= MR (go up to demand)

The Price at which the producer can sell an additional item (an increment to revenue) and the reduction the price reduction from selling one additional item

change in p = p/ q x n (n denotes elasticity for product)

MR = P x (1-1/n). (At the Monopoly quantity, MR is always positive, thous n >1, thus elastic, thus monopolists always operate on the elastic portion of demand curve.

The markup (the difference between price and marginal cost to produce it) If there's a high elasticity, markup is low (b/c bitches can substitute or not buy the product.) and vice versa (as a fraction of P) = 1/n

When MC= MR

In an optimal subsidy, marginal cost is shifted down so that it hits the point exactly parallel to where MC 1 = D (or the competitive quantity/price.) At this price, consumers have the same exact surplus as they did under competition (but tax payers have to pay the amount of the subsidy, ) and Producers get the competitive price + the amount of the price. (Tax money cancels out) and Social gain= the same as it did under competition.

Government could impose a price ceiling (ideally at the competitive price) of which the monopolist cannot exceed. If it's too high, it's effect will be diminished (loss reduced not eliminated altogether. If it's too low, there will also be dead weight loss due to excess demand. Could be efficient in an ideal world but actually no easier find optimal level than with subsidy.

In practice, many monopolists are required to set prices at which they'd earn no more than a "normal rate of return" on capital investments. (they are required to earn zero economic profits like in other industries.) In this case, they produce at a price where Price = Average Costs, rather than the efficient level (where MC = Demand)

an industry where each firm's average cost curve is decreasing at the point where it crosses market demand (thus competitive industry would earn negative profits because they produce at a price of MC.) The natural monopoly's have decreasing ATC at the where it intersects the demand curve, thus the monopolists price is less than it's average cost. C industries would earn negative profits at this point b/c the produce where MC intersects D, thus their price would be negative. Ex: a company like Microsoft where the cost of one additional is very low (innovation for the idea may be costly but production for 1 additional is close to nill)

pros: incentive to innovate, cons: decreased competition

monopiles result from efficiencies from producing multiple products at a single firm.

if entry into a particular industry is legally restricted, those who do have legal basis are granted a monopoly market power

charging different prices for identical products

Each customer is charged their marginal value for the product. Example: Sara pays $13 for the first pay, $12 for the second pie, while Allison pays $10 for the first pay and $8 for the second pie. Consumers have no surplus because they are paying exactly their Marginal Value and the producer gets all the surplus (the entire area below each price and above supply curve) (Often close to quantify people's exact marginal values for things)

Charging the same customer a different price for identical items (quantity discounts.) Second Degree benefits both consumer and producer.

Most common. Occurs when a seller faces two different markets of consumers. 1: Engage in 3rd degree price discrimination in one market and competition in the other market. 2: Engage in monopolistic third degree price discrimination in two different markets (charge the monopoly prices to Adults and Charge)

if the elasticity of demand is greater for C than it is for A, the price will be less for C. (children's haircuts) This is because price discriminating monopolists offer lowest prices to most price sensitive customers

must have monopoly power (b/c other people would just buy at the lowest price) and resales must be preventable!

airlines charging lower prices for tourists (who's demand is more elastic and more likely to not travel if they have the option) Business travelers don't have that option, so their demand is pretty inelastic. "free delivery" for furniture ) (for people who are too lazy to get the stuff themselves (more elastic demand)

occurs when a company offers a less costly version of it's item b/c it facitiliates price discrimaition. (charge a higher price to one group of people who will pay it and sell a lower quality version at a lower price to the people who wouldn't have paid it otherwise)

"an entry fee" that grants the right to purchase future goods/services. Ex: Costco's admission price and then discounted goods (average), Disney World chargers low fees for entry and then charges per ride (to satisfy different tastes of costumers), capture the market who don't give a shit about particular rides and can substitute for another amusement park

Set the admission fee at PC (competitive or low price), capturing a smaller producer's surplus, but also capturing the entry fee (the area above the price). In a two part pricing strategy, Consumers surplus is nil and goes to Producers Surplus at the competitive price.

A merger of firms that produce the same product. Motives: reduced costs from efficiencies from merging and the opportunity to gain market power from becoming ONE BIG SCARY FIRM. Example: Pepsi (owns a variety of other soda companies)

Before the merger, the industry produces at a competitive output where MC = supply. Then, the company merges with another firm, lowering Marginal Cost to MC'. Since the firm now has monopoly power, it produces where MC = MR, thus reducing quantity, and driving up price to P'.

mergers used to be disallowed by courts b/c they were seen as anti consumer, not they're considered constitutional b/c they increase market inefficiencies.

The company that produces the inputs (computer chips) merges with the company that produces the final product (laptops)

Segate makes computer chip for laptop producer Dell. Dell produces at Qm but then takes ownership of Seagate, thus capture the CS (since they are Consumers of computer chips) Now Dell gets both CS and PS and social gain is increased.

occurs when a firm sets prices so low so as to incur losses, forcing it's rivals to do the same. Predation not profitable b/c other firms would re-emerge as soon as it raises prices, the losses incurred by predatory firm are > than those of the preyed upon firm. Usually firms that are being preyed upon can also borrow funds in the meantime. Economically is not viable.

Amazon selling books for like half price, Standard Oil Company, etc.

a practice by which the producer of a product sets a retail price and forbids any retailer to sell at a discount (ensures that retailers offer high service and provide information to the customers about the product) Apple ensures that it's retailers will provide competitive service instead of providing competitive (low) prices.

it's plausible that book publishers would want to engage in retail price management (essentially prohibiting Amazon from selling discounted books) so that quality of services at B and N is not diminished due to the free rider problem.

an agreement among firms to set prices and outputs (when firms in an industry) cartels participate: restrict each other's output so the firms can charge the monopoly price. Price is set above Marginal Cost

A game in which the players are prevented from cooperating and in which each has a dominant strategy that leaves them both worse off than if they could cooperate.

whether or not to cheat on the restricted output (prisoner's dilemma) Industry output is held below competitive level. (Any firm can increase it's profit by selling a few more items at a slightly lower price) If one cheats, the next cheats and output goes all the way up to the competitive level.

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Government has regulatory agencies to limit the influences of cartelized industry

monopolies could agree to not sell more than agreed upon quantities to wall mart

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regulation is generally undesirable for firms, so they respond creatively (without undermining the law) but find ways to get around. Example: Affirmative Action (African Americans received higher salaries, but less job training to offset the new legislation)

an industry where the # of firms is small enough so that any firm's actions can affect market conditions. Each firm has a certain degree of market power

a market in which firms can enter costllessly (where there are no fixed costs to entry) It the market is contestable, firms will enter at any price above Po. The market price cannot be hire than this, because mad firms will enter. At this price, the firm supplies q0 of output and the market demands q1.

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. In a contestable market, the average costs are decreasing at the point of industry demand. Therefore a comp. firm would earn negative profits.

Oligopoly model in which firms produce a homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce.

QA= QB QM= 1/2QC, therefore QA= 1/2 (QC-QB) = QA= 1/3 QC (1/3 the competitive quantity)

each firm assumes that the other firms prices is fixed, they continue to undercut each other's prices until price=MC (as it does in a competitive industry)

not realistic because Firm A assumes Firm B's price/quantitty is constant and not dependent on what the other firm is doing

a positioning strategy that some firms use to distinguish their products from those of competitors. Colgate and Crest have a slightly different product character so they face a slightly downward sloping downward curve (not perfectly competitive like wheat)

a decision is efficient if it increases the satisfaction of some voters or at least does not worsen any. When there is no unanimity (often times the case, the Pareto criterion remains silent)

if there is a possibility of unanimous defeat, then it should be immediately rejected

If the government provides a $50 rebate for every insulation sold, then the demand curve will shift up a vertical distance by that rebate and the quantity supplied will shift out to q'. The price sellers receive is now PS (where D' and S intersect) but the cost to consumers is Ps-$50 because they are receiving the rebate. Thus their CS is at PD, an d they pay the entire rectangle in tax dollars. Total surplus is decreased by the deadweight loss (E).

A maximum price set below the equilibrium price, so it actually has an effect on supply and demand.

The price ceiling is set at P0. At this price, Quantity Demanded exceeds Quantity Supplied. (Producers supply less because they're getting paid such a low price.) The price consumers paid is bid up to P1 because that is the only point where supply actually meets demand. (Consumers are willing to pay more in violation of the law to avoid waiting in lines, etc.)

Add up all their individual rectangles (their marginal values for each cup x quantity) (bx H) and then subtract that from the price they collectively pay

Sum of the areas above the industry supply curve out to quantity and below price

Always reduces the welfare of Americans. The supply curve is elastic so Japanese can do whatever the **** they want.

Prices rises by the size of the tariff (Consumer Surplus falls by that amount) Tax revenue increases and Producers surplus increases b/c ppl are importing less but the cost to consumers > benefits to everyone else. (deadweight loss)

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Why are diamonds so expensive and water basically free if water is a life-sustaining resource and diamonds are used primarily for decoration? Shouldn't price reflect value? No, because the price reflects marginal value not total value. Because water is more available, you're willing to pay less for each additional bucket of water than each additional diamond.

The theory that the price of a good is determined by its cost of production. Ignores the fact that price isn't determined by effort of production but rather by demand. Why do bbal players who provide far less social gain than teachers make so much more money? B/c they provide more marginal value. Price doesn't reflect the true value of society.

equimarginal principle (interestingly, social gain is maximized (the least deadweight loss) at the competitive quantity which the market sets for itself where Marginal Cost = Marginal Value.

even in the effects of markets on all other markets, competitive equilibrium is still pareto optimal

The collection of all pareto optimal points

(HW example) if the government distributes a gasoline ration (less than the equilibrium quantity), it will drive up the Price to Pd (where the demand curve is at q1.) However, the price supplied at this quantity is lower than the price demanded. Thus the ration = rectangle Pd- Ps. The social gain of the ration is equal to B + C + E and the deadweight loss is E.

the relative price that would prevail if there were no trade with foreigners (

an efficient system in which no allocation of given goods can be made without making at least one individual or group worse off (used when trying to figure out how to minimize DWL)

The tariff would cause input prices for supply to shift upward (raising the price for American consumers and decreasing CS.) To calculate if it's better for the welfare of Americans, see if the tariff revenue > costs to consumers.

the rent earned by factors of production is the excess of payments- the amount needed to call it into existence. The supply for land is vertical, thus all the revenue collected by landlords is RENT

they believe that the government should allocate/appropriate rent to people but the fly in the ointment is that not everyone has the same value of land, (misallocation)

If college had no benefit other than to prove that you were smart, than the signal would be a failure so long as dumb kids could go to school at the same price as smart kids. Dressing for success, natural selection, etc.

if truthfulness could be maintained in the car sale market, social gain would be improved because the good cars would find their ways into hands of buyers who value them more than the sellers do. Similar concept for Financial crisis of 2008

When the act of insuring an event increases the likelihood that the event will happen

When a principal contracts with an agent but the principal and the agent have different maximization objectives. The principal wants to maximize firm profit, the agent wants to maximize personal profit.

wages higher than market equilibrium that will make losing the job particularly painful (to discourage the principal- agent problem)

1. bonuses (based on the firm's performance), and stock options: meaning that the CEO is either required or offered to purchase a large portion of the company's stock (to keep them accountable)

If plumbers over-estimate the rate of inflation, they will provide too little service (because they believe their real wages are lower) Inflation > unemployment because people know they're not actually making in real terms

the idea that market prices always incorporate all available information, and therefore represent true value as correctly as possible

housing market crashed due to the cycle that everyone expected prices to keep rising --> kept buying --> prices rose and then burst

Produces at a point where demand curve is perfectly curve (meaning that the individual firm is a price taker, not a price maker), and marginal cost is upward sloping

downward sloping because people are reactive to price in the industry, but not for an individual firm (because they will just not purchase from the firm)

A perfectly competitive firm produces at a point where Price = Marginal Cost. The Marginal Cost is upward sloping generally and the demand curve is flat.

At a market price price of $50, the firm produces q2 items. It earns positive profits where MC > P and breaks even where MC = P. Keep producing if later profits outweigh negative losses.

When Price < AVC in short run, shut down

%P/%Q. The more elastic the supply curve is, the more it will change with a change in price! (

entry/exit not possible in the short run so number of firms is fixed, as price rises, (due to an increase in demands) firms increase output and firms that weren't producing before start producing

equilibrium price rises,

An industry in which expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs. LONG RUN INDUSTRY SUPPLY CURVE IS FLAT

the price at which the seller earns zero profit (where Marginal Cost and Average Total Cost Curves Cross)

Factors that cause a producer's average cost per unit to fall as output rises.

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denying a source of supply to a purchaser or an outlet for sale to a seller, thus potentially threatening competition (threat of nearly all vertical mergers)

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predatory pricing makes no sense because its pricing where P < AVC, better to shut down than to produce.

Firms indirectly coordinate actions by signaling their intention to reduce output and maintain pricing above competitive levels.

Stable demand and cost conditions Price can vary for other reasons than
cheating by cartel members
Buyers report prices
Few buyers and sellers
Homogeneous product
Cut price by offering better quality, credit, service

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The 1/P (

MR = P(1-1n)

A situation in which a firm, after learning of the strategies selected by other participants, no participant has an incentive to change his strategy. (Once the strong pic realizes that the weak pig isn't gonna push the lever, he does it if he wants to get food at all.) (doesn't need have a dominant strategy)

strategy is the same no matter what (doesn't depend on the strategy of the other player)

A game in which the players are prevented from cooperating and in which each has a dominant strategy that leaves them both worse of than if they could cooperate. (They both get 5 years because they both confess as to avoid a larger punishment, but the punishment is also greater than it could have been if 1 confessed and 1 didnt.

when helping on person is impossible without hurting someone else (on the concrete curve)

a change that helps someone without hurting others (no one should object to the pareto improvement.) One is better off, one is unchanged)