Microeconomics Ch. 14-18 Study Guide
Microeconomics Ch. 14-18 Study Guide ECON 1010
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Date Created: 05/02/16
1. large number of firms 2. make similar but slightly 3 main characteristics of monopolistic competition: different products (product differentiation) 3. ease of entry and exit 3 main results from 1. no one firm can effectively influence what other firms do (each only has a monopolistic competition: (hint: small part of the total industry output) how firms influence one 2. the firm faces a downward sloping demand curve another, type of demand curve, 3. firms cannot earn long-run economic and economic profit) profit collusion: when firms conspire to fix a higher price What is collusion? Is it possible No, because the number of firms in with monopolistic competition? monopolistic competition is large, coordination is difficult, and collusion is impossible 1. quality (design, reliability, and Product differentiation enables service) firms to compete in 3 areas: 2. marketing 3. Price What two forms does marketing 1. advertising take? 2. packaging What are some examples of - clothing, jewelry, computers, monopolistic competition? and sporting goods - produces where MR = MC In what ways do firms in monopolistic competition behave in ways similar to a firm can earn short-run economic monopolist? (hint: at what output doesprofit it produce for maximum profit, what - firm produces less than capacity type of economic profit does it earn, (less than the output that minimizes how much does it produce) its ATC) Can a firm in monopolistic no, in long run equilibrium, firms neither enter nor leave the competition make an economic profit in the long run? Why? industry and the firms in the industry make zero profit As firm in monopolistic competition enter the industry, decreases, left the demand for each existing firm's product _______ and the demand curve shifts ______ In monopolistic competition, the decrease in demand ______ the decreases, lowers quantity at which MR = MC and ______ the maximum price that the firm can charge to sell this quantity. In monopolistic competition, price and quantity _____ with fall, ATC, zero firm entry until P = _____ and firms earn an economic profit of ____. excess capacity when a firm produces less than its efficient scale the quantity at which ATC is a efficient scale minimum (the quantity at the bottom of the U-shaped ATC curve) What are the two key differences between 1. excess capacity monopolistic competition and 2. markup perfect competition? markup amount by which a firms P exceeds its MC Firms in monopolistic long competition operate with excess capacity in ____ - run - the downward sloping demand equilibrium. What drives this curve drives this result (implies result? that MR < P) positive Firms in monopolistic competition operate with ______ - the downward sloping demand markup. What dries this result? curve drives this result (implies that MR < P) In monopolistic competition, buyers pay a ___ price than in higher, more perfect competition and also pay ____ than marginal cost when marginal social benefit When are resources used equals marginal social cost efficiently? MSB = MSC Do firms in perfect competition no have excess capacity or markup? What drives this - they have a perfectly elastic result? demand curve Is the market structure in no, but consumers like variety monopolistic competition efficient? Why is the market structure in because firms charge price in monopolistic competition excess of MC inefficient? In what two ways do advertising expenditures affect the profits 1. increase costs 2. change demand of firms? Advertising costs per unit ____ decrease, increase as the quantity produced ______ The total cost of advertising is ____. But the average cost of fixed, decreases advertising _____ as output increases. signal action taken by an informed person (or firm) to send a message to uninformed people 1. relatively few firms 2 main characteristics of an oligopoly: 2. natural or legal barriers prevent entry of new firms economies of scale (when cost What creates a natural of production increases as oligopoly? output increases) and demand duopoly oligopoly market with two firms With a small number of firms in an oligopoly market, does each yes firms actions influence the profits of all other firms? cartels group of firms acting together to maximize profit firms in oligopolies may make long ___ -run profit In oligopolies, there is a tendency for individual firms to cheat _____ on agreements In an oligopoly, what does the P the P and Q of the other and Q of a producer depend on? producers What is the model developed to Game Theory explain the prices and quantities in oligopoly markets? Who invented game theory and John von Neumann 1937 when? What is "The Prisoners to generate predictions Dilemma" used for? - if both prisoners confess to a crime they will get 3 years What is the Prisoners Dilemma? - if one confesses and the other does not, the confessor will get 1 year while the other gets 10 set of tools for studying strategic game theory behavior (behavior that takes into account the expected behavior of others and the recognition of mutual interdependence) strategies all the possible actions of each player a table that shows the payoffs payoff matrix for every possible action by each player for every possible action by each other player What is the dominant strategy to cheat for the Prisoner's Dilemma? A dominant strategy is _____ the same regardless of the strategy used by the other player dominant strategy equilibrium when both players have a dominant strategy when neither player has an incentive to change his strategy Nash equilibrium player A takes the best possible action given the action of player B and player B takes the best possible action given the action of player A What is the Nash equilibrium to cheat for the prisoner's dilemma? cartel group of firms that enter into a collusive agreement collusive agreement when firms restrict output in order to raise prices and profits Members of the cartel have an cheat incentive to _____ If 1 firm in a duopoly cartel price falls cheats and expands output, what happens to price and total total revenue for the firm that cheated increases, total revenue revenue? for other firm falls Do both firms have an incentive yes to cheat and expand output on a cartel agreement? - when the firms make and cooperative equilibrium share the monopoly profit in a duopoly - must be penalized for cheating when a player cooperates in the current period if the other player tit-for-tat strategy cooperated in the previous period, but cheats in the current period if the other player cheated in the previous period when a player cooperates if the other player cooperates but plays the Nash equilibrium trigger strategy strategy (player A takes the best possible action given the action of player B and player B takes the best possible action given the action of player A) forever thereafter if the other player cheats What are the two extremes of 1. tit for tat punishment if cheating occurs 2. trigger in a cooperative equilibrium? What is a mechanism firms can price leadership use to avoid competition and price cutting? price leadership one firm sets market price and other firms match What happens if price cutting is there are no gains from matched? cheating With price leadership, the courts collusion may confuse competition with ______ market in which firms can enter contestable market and leave so easily that firms in the market face competition from potential entrants What type of competition does perfect competition a contestable market operate under? limit pricing sets the price at the highest level that inflicts a loss on the entrant - dare your opponent to flinch The game of "chicken" or turn away (winner gains status and loser is labeled a "chicken") - 2 aircraft companies consider producing a new airplane International trade game - only one firm can profitably exits in the market - profits form developing the airplane depend on the actions of the other firm In the international trade game, neither - two Nash equilibriums which firm has the dominant with very different payoffs strategy? What does the winner of the - commit to entry (advantage to international trade game need first mover) to do? modifying the payoff matrix so that a player has a dominant strategic subsidy strategy to enter (if a company offers another company money to enter the industry) What are the two types of 1. The Sherman Act (1890) antitrust laws? 2. The Clayton Act (1914) - outlaws any combination, trust or conspiracy to restrict interstate or Sherman Act (1890) international trade - outlaws monopolization or attempt to monopolize interstate or international trade lessen competition or create a monopoly:y substantially Clayton Act (1914) 1. price discrimination 2. tying arrangements 3. requirements contracts 4. exclusive dealing 5. territorial confinement 6. becoming a director of a competing firm - outlaws unfair methods of Federal Trade Commission Act (1914) competition and deceptive business practices (advertising) Robinson- Patman Act (1935) strengthens laws against price discrimination Cellar-Kefauver Act (1950) outlaws acquisition of competitors assets resale price maintenance (RPM) manufacturer requires retailers to sell at or above a minimum price - Price competition among retailers should increase sales Why would the manufacturer and benefit manufacturer want a minimum price in RPM? - Retailers might like RPM as means of enforcing cartel agreement but hurt manufacture When is RPM inefficient? if it enables dealers to charge the monopoly price if it enables a manufacturer to When is RPM efficient? induce dealers to provide the efficient standard of service agreement to sell one product tying arrangement only if the buyer agrees to buy another, different product setting a low price to drive predatory pricing competitors out of business with the intention of setting a monopoly price when the competition has gone when two or more firms agree mergers to combine to create one larger firm acquisitions when one firm buys another firm b/c they don't pay for services, Why are discount stores free- they are more profitable and rides? drive full service store out of business resale price maintenance What prevents free riding? - by eliminating price competition, firms compete on other dimensions (such as service) - type of tie-in sale Block booking (what is it and - seller offers a bundle of commodities what type of sale is it?) rather than allowing separate sales (common in distribution of movies) When does bundling increase if buyer's tastes for goods are profits? negatively correlated Set predator prices _____ costs below, drive rivals out of market in order to: Once rivals leave, (in predatory rises, monopoly profit pricing), predator ____ price to obtain: Is predatory pricing efficient? for predatory pricing, firms are equally efficient - If victim can borrow money until prices are raised, he can share in the monopoly profits Is predatory pricing rational? - The victim has the option of shutting down while When will predators predatory has to produce and sell at low prices be successful? - If the victim cannot borrow money, he may be driven out of business 1. horizontal merger 3 types of mergers 2. vertical merger 3. conglomerate merger Why merge? - pursuit of market power - economics of scale In monopolistic competition, the amount of the markup P>MC by how much? In perfect competition, what D = perfectly elastic type of elasticity of demand is there? In the long run, is the quantity efficient? Q in long run = efficient scale Is there a markup in perfect No, firm produces at least competition? why? possible cost With no advertisements, profit small, large, high maximizing output is ____, markup is ___, and price is ____. Price _____ as markup ______ decreases, decreases If the HHI < 1,000 what type of monopolistic competition market exists? (COMPETITIVE) market with HHI between 1,000 moderately concentrated and 1,800 market with HHI > 18000 concentrated market collusion agreement achieves monopoly the same output as _____ in the industry it collapses, b/c neither firm will When both firms cheat, what happens to the collusive cut price below competitive equilibrium (if they do it leads to agreement? an EL) 2 features of public goods 1. nonrivalry 2. nonexcludable Examples of pure private goods food, car, house Examples of excludable and cable, bridge, highway nonrival goods Examples of Nonexcludable and rish in the ocean, air rival goods Examples of pure public goods lighthouse, national defense if the public good is non- The free rider problem excludable, no one will pay for them Why is there a need for public the private sector under provision? provides public goods private choice decision that has consequences for only the person making it decision that has consequences public choice for many people and perhaps for an entire society 1. they establish and maintain property rights What are the 3 main reasons 2. they provide non-market mechanisms that governments exist? for allocating scarce resources 3. they implement arrangements that redistribute income and wealth What is the fundamental property rights foundation of the market economy? situation in which government government failure actions lead to inefficiency (either underprovision or over provision) 1. voters What are the four groups of 2. firms decision makers that interact in 3. politicians the political marketplace? 4. beureaucrats - support politicians who's policy proposals make them better off How do voters interact in the - express their demand for public goods and political market place? services by voting - help political campaigns, lobbying, and making campaign contributions - make campaign contributions and are a major source of funds for political How do firms interact in the parties political market place? - engage in lobbying activity to persuade politicians to propose policies that benefit them - from coalitions (political parties) to develop policy proposals, which they present to voters How do politicians interact in in the hope of attracting majority support the political market place? - direct bureaucrats in the delivery of public goods and services and other policy actions votes to a politician are like profit ______ to a firm - administer tax collection, the How do bureaucrats interact in delivery of public goods and the political market place? services, and the administration of rules and regulations the choices of voters, firms, politicians, and bureaucrats are all political equilibirum compatible and no group can see a way of improving its position by making a different choice What are the two forces of 1. voters demand in the political 2. firms marketplace? What are the two forces of 1. politicians supply in the political 2. beaurocrats marketplace? What do politicians and bureaucrats supply to voters 1. policy proposals 2. public goods and services and firms? What do voters and firm supply 1. votes, campaign funds, lobbying to politicians and bureaucrats? 2. taxes if it is possible to prevent excludable good someone form enjoying its benefits nonexcludable good if it is impossible (or extremely costly) to prevent anyone form benefiting form it rival good if one person's use of it decreases the quantity available for someone else nonrival good if one person's use of it does not decrease the quantity available for someone else private good both rival and excludable both non-rival and non-excludable public good - simultaneously benefits everyone - no one can be excluded from its benefits What is an example of a private can of coke good? What is an example of a public national defense good? common resource rival and nonexcludable What is an example of a ocean fish common resource? natural monopoly good nonrival and excludable - when buyers can be excluded What is the marginal cost of a natural monopoly good? if hey don't pay but the good is nonrival, MC = 0 private good the production or mixed good consumption of which creates an externality cost (external cost) or benefit (external externality benefit) that arises from the production or consumption of a private good and that falls on someone other than its producer or consumer negative externality imposes cost positive externaltiy provides benefit What are 2 things that have the 1. education greatest impact on your 2. health care welfare? What types of goods are mixed goods with external education and healthcare? benefits government (education and Who provides private goods? health care) - "free" for everyone What is the optimal level of a non-rival public good? government adopts decisions majority rule that receive over half of the votes ice cream vendors compete for spatial competition (example) customers through location on a beach tendency for competitors (including political parties) to principle of minimum make themselves similar to differentiation appeal to the maximum number of clients or voters candidates relocate on the median voter model political spectrum until they both adopt the position of the median voter 1. bimodal (having two criticisms of the median voter maximas) 2. decision to vote may depend model on proximity to candidates position - voting = costly - expected benefits are negligible Voting paradox - b/c costs exceed expected benefits, rational person shouldn't vote - rational ignorance - economic factors help explain turnout voting gives _____ weight to each equal person When is it rational for a voter to unless it effects their economic be ignorant on an issue? well being, they can be ignorant What do rationally uninformed voters enable bureaucrats and over-provide public goods special interest groups to do? Most of the goods and services mixed provided by the government are _____ goods the benefit that the consumer of marginal private benefit a good or service receives from an additional unit of it benefit from an additional unit marginal external benefit of a good or service that people other than its consumer enjoy the marginal benefit enjoyed by society: marginal social benefit - by the consumer of a good or service (marginal private benefit) - by others (marginal external benefit) MSB = MB + marginal external benefit The marginal social benefit MPB, MEB curve is the sum of the ______ and the ______ at each number of students To enable the marginal social taxpayers cost for college tuition to be paid, ____ must pay the balance per student per year good or service is produced by a public authority that receives its public production revenue from the government (ex: state colleges and universities provide education services) subsidy payment that the government makes to private producers token that the government provides to households which voucher they can use to buy specified goods or service (ex: food stamps) 1.vouchers can be used with public production, private provision, or competition between the two 2.governments can set the value of vouchers and the total What 4 advantages do vouchers voucher budget toovercome bureaucratic overprovision and 3.vouchers spread the public contribution thinly across millions of have over public production and consumers, sonoone consumer has an interest in wasting pat of subsidies? the value received in lobbying for over provision 4.by giving the buying power tothe final consumer, producers must compete for business and provide a high standard of service at the lowest possible cost marginal private cost cost of producing an additional unit of a good or service that is borne by its producer cost of producing an additional marginal external cost unit of a good or service that falls on people other than the producer the marginal cost incurred by the producer and by everyone else on marginal social cost whom the cost falls (by society) - the sum of marginal private cost and marginal external cost MSC (marginal social cost) = MC + marginal external cost cost or benefit that arises from externalities an economic transaction and that falls on people who do not participate in that transaction What are 2 examples of 1. pollution negative externalities? 2. traffic congestion What are 2 examples of positive 1. flu vaccines externalities? 2. flower beds What do externalities result a divergence between private from? and social interests What does efficiency require? Marginal Social Benefit = Marginal Social Cost Is private decision making no efficient? What are 3 ways to fix the 1. establish property rights inefficiency that arises from an 2. mandate clean technology external cost? 3. tax or price pollution legally established titles to the property rights ownership, use, and disposal of factors of production and good and services that are enforceable in the courts b/c establishing property rights where they do not currently exist Why can establishing property can confront producers with the rights fix the inefficiency that costs of their actions and provide arises from an external cost? the incentives that allocate resources efficiently In many situations, transactions high, cannot costs are ____ and property rights ____ be enforced. In this instance, what two methods can 1. emission charges 2. marketable permits the government use? Emission Charges charges are price per unit of pollution 1. Marginal social cost What does the regulator of 2. Marginal social benefit --> emission charges determine? benefit received by buyer + benefit to others - the regulatory agency can establish a pollution limit for each potential Marketable Permits polluter and issue them a permit - the firms then buy and sell these permits themselves What do marketable permits they remove the need for the regulator to know every firm's achieve? marginal benefit schedule abatement technology production technology that reduces or prevents pollution in the absence of transactions costs, the Coase theorem: what is it? is it assignment of property rights has no strictly true? why or why not? effect on the allocation of resources - not strictly true, b/c of income effects Externalities are _____ that don't transactions take place Coase argues that externalities an absence of property rights arise because of: transaction costs the opportunity costs of conducting a transaction What are the two main methods 1. taxes of confronting polluters with the 2. cap-and-trade costs of their decisions? when governments use taxes as an incentive for producers to cut back on pollution they create Pigovian taxes * main idea: tax negative externalities, and subsidize positive externalities - in honor of A.C. Pigou - you set the tax equal to the marginal external cost With Pigovian taxes, what do you set the tax equal to? What - firms can be made to behave in the same does this result in? way as they would if they bore the cost of the externality directly (internalize external effects of private actions) What is Pigou's subsidy? What you subsidize homeowners to the amount of external benefit do you set the subsidy equal to? they give their neighbors - upper limit What is a cap? - a pollution quota What does the government set they set the cap equal to the the cap equal to? efficient quantity of pollution the overuse of a common tragedy of the commons resource that arises when its user have no incentive to conserve it and use it sustainably and efficiently A common resource is being its rate of use persistently used unsustainably if: decreases its stock its rate of use is less than or A common resource is being equal to its rate of renewal so used sustainably if: that the stock available either rows or remains constant common resources property owned in common With common resources, join no ownership ownership is equivalent to: common resources are ______ overused - atlantic ocean cod stocks examples of common resources: - south pacific whales - quality of earth's atmosphere As the number of fishing boats increases, the quality of fish caught decreases increases to some maximum. Beyond that maximum, the sustainable catch ______. The quality of fish caught by decrease, increases each boat _____ as the number of boats _____ . Fishers inter the industry until the marginal cost of fishing the average catch equals: - too many fishing boats What does this result in? 1. set Pigou tax = average catch and marginal tax How can you achieve the 2. set quota (limit number of boats) 3. property rights: auction off rights to efficient outcome with fishing? fish (creates revenue for govt.), assign property rights and allow permits to be traded What are the three main 1. property rights methods used to achieve the 2. production quotas efficient use of a common 3. individual transferable quotas resource? (ITQs) private One way of overcoming the tragedy of the commons is to b/c its owner faces the same covert a common resource to conditions as society faces (it doesn't matter who owns the ______ property. Why? resource) upper limit to the quantity of a production quota good that may be produced in a specific period Production quotes bring a move efficient toward a more _____ outcome 1. it is in every fisher's interest to catch more fish than the quantity permitted under the quota What are the two problems with 2. marginal cost is not (in general) the same for all producers but burearucrats who allocate implementing a production quotas don't have info about the MC of individual quota? producers (even if they tried to get this info producers would have incentive to lie to get bigger quota) a production limit that is assigned individual transferable quota to an individual who is then free to transfer (sell) the quota to somone else the market price of an ITQ is the highest ____ price that someone is willing to pay for one. The price is MSB - _____ P = MSB - MSC Fishers trade ITQ's. Those with low marginal cost buy ITQ's high from those with ____ marginal cost and the market price of an ITQ settles Why does no one have an because to do so would send incentive to exceed the ITQ? MC above price and result in a loss - from households to firms: labor, What flows from households to land, capital, entrepreneurship firms? and then from firms to households? (clockwise) - from firms to households: goods and services What flows from firms to - from firms to households: wages, rent, interest, profits households and then from households to firms? - from households to firms: (counterclockwise) expenditure on goods and services What are incomes determined 1. resource prices by? 2. quantities of resources used 1. the wage rate for labor What are the three factors of resource prices? 2. the interest rate for capital 3. the rental rate for land Labor is a _____ demand derived demand for a productive derived demand resource, which is derived from the demand for the goods and services produced by the resource 1. labor What are the four factors of 2. capital production? 3. land 4. entrepreneurship What types of labor services are casual labor traded day by day? What type of market is for rental market capital services? rental rate the price a capital services market nonrenewable natural resources resources that can only be used once change in total revenue that value of the marginal produt results from employing one more unit of labor As the quantity of labor decreases increases, the value of its marginal product _____ because of: - diminishing marginal product The labor demand curve is the the marginal product curve value of: Firms hire employees until the the value of the marginal wage rate = product VMP = WR Other than when MR = MC, when else is profit maximized? value of the marginal product = the wage rate 1. the price of the firm's output What three factors does the 2. the prices of other productive demand for labor depend on? resources 3. technology the higher the price of a firm's greater output, the ____ is the firm's demand for labor If the price of using capital decreases relative to the wage labor, increases rate, a firm substitutes capital for _____ and ______ the quantity of capital it uses. - new technology can either increase or decrease the need for labor How do new technologies effect - decrease: technology can replace workers demand? - increase: need more workers to make this new technology When does the QUANTITY of - increase: when the wage rate decreases labor demanded by a firm increase? When does it - decrease: when the wage rate decrease? increases - If the price of a firms output or substitute decreases When does a firms demand for labor (shift in the demand - If the price of a complement rises curve) decrease? - if a new tech./capital decreases the marginal product of labor - if the price of the firm's output or substitute increases When does a firms demand for - if the price of a complement decreases labor (shift of the demand curve) increase? - if a new tech./capital increases marginal product of labor by adding together the How do you determine the quantities of labor demanded market demand for labor? by all the firms in the market at each wage rate People can allocate their time labor and leisure between which two broad activities? reservation wage the lowest wage at which someone is willing to supply labor substitution effect (on wages) higher wages induce people to work more higher wages increase the income effect (on wages) demand for leisure, thus, inducing people to work less as wage rates rise, the income effect eventually becomes larger than the backward-bending supply of substitution effect (people make so labor curve much money that instead of working more they want more leisure, so higher pay doesn't lead to more work) increased Overall, technological change as - it has destroyed some jobs, _____ the demand for labor. but created more higher paying jobs 1. population increases (more people What are two main trends in the are working in general) supply of labor? 2. the mechanization of home production has increased the supply of labor (more women are working) High skilled workers can more perform ____ tasks than low skilled workers Wage rates ____ over time and increase, upward trend ____. Why do wage rates increase the value of marginal labor also over time? increases over time human capital The acquisition of a skill is an - it is costly investment in what? Why? - the cost is paid prior to receiving a higher wage human capital the accumulated skill and knowledge of human beings Wages compensate labor for: time spent on the job ____-skilled labor must be high compensated for time The equilibrium wage rate is high, low higher for ____- skilled labor than for ____ - skilled labor There is a __% - __% return/year on high school and college 5-10% education What two factors are related to 1. age income? 2. education When quantity demanded is rise (more incentive to work and greater than quantity supplied, supply more) wage rates will ____ When quantity demanded is fall (don't need to hire as many less than quantity supplied, workers to supply products) wage rates will ____
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