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# ARE100B Finals Study Guide - Whitney ARE 100B

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This 11 page Study Guide was uploaded by Jessica Notetaker on Tuesday December 8, 2015. The Study Guide belongs to ARE 100B at University of California - Davis taught by Marilyn Whitney in Summer 2015. Since its upload, it has received 157 views. For similar materials see Intermediate Microeconomics in Agricultural & Resource Econ at University of California - Davis.

## Popular in Agricultural & Resource Econ

## Reviews for ARE100B Finals Study Guide - Whitney

Better than the professor's notes. I could actually understand what the heck was going on. Will be back for help in this class.

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Date Created: 12/08/15

1 Sources of Monopoly Power Patent legal document allowing an inventor to produce or sell product for a period of time eg pharmaceutical industry Copyright legal right over a work of art such as books lms music etc Legal License most commonly used in sin industries eg California lottery Economies of Scale more you produce less it costs per unit of production eg natural monopoly 11 Price Discrimination Firstdegree perfect price discrimination 0 Firms sell greatest quantity if it has monopoly power in the output market 0 Each customer is charged by how much he or she is willing to pay reservation price even though it s most pro table strategy it s complicated for 2 reasons I Way to nd customers reservation prices I How to make customers keep quiet about price info Seconddegree price discrimination o Aka volume discounting and block pricing 0 Offer a customer multiple prices based on quantity multiple pricing strategy Thirddegree price discrimination 0 Charge different prices for different types of customers 0 Customers who are pricesensitive sort themselves into a group that looks for couposn and seniorstudent discounts III Pricing Strategies with Market Power Intertemporal price discrimination 0 Separate customers less sensitive from those more elastic demand over time 0 Example charging more on release date and dropping prices after Peakload pricing 0 Demand is varied over time 0 Example demand is high for vacation homes during holidays Twopart tariff 0 Customers pay two fees 0 Example membership fee and price per unit of good or service 0 Best strategy if all customers have identical preferences Bundling 0 Selling 2 or more items in a bundle IV Cournot Model A Concepts Simultaneous Quantity Setting holding others Q as a constant Market price of good falls as number of oligopolists in the market rise Given other rm s production each rm chooses optimal output One weakness of this model is that the quantity setter assumes rivals don t do anything to their quantities constant Q when it increases its output In fact rivals could potentially drop their output levels Since market price is dependent on the total output pro ts of other rms are directly affected by the quantity of one rm B Solve for 2 rms 1 Find inverse demand function PfQ 2 Assume q2 is xed and write out the pro t function for rm 1 3 Take the derivative of pro t function of rm 1 and set it equal to 0 to get its reaction function 4 Now maximize rm 2 s pro t function and nd its reaction function 5 Substitute one reaction function into the other and solve C Solve for N identical rms 1 Find inverse demand 2 Find each rm s Cournot MRi by using shortcut eg lQ 9 05Q05qi 3 Equate MRiMCi 4 You know that QNqi so plug in for Q in MRi 5 Solve for qi function if N known solve QNqi P and pro t PqiTCqi 6 Producer Surplus PS pro tl pro t2 FCl FC2 V Bertrand Model A Concepts Simultaneous price setting no other rm can pro t more by charging different price Given other rms prices each rm chooses optimal price Result is same as perfect competition in the shortrun Barriers to entry such as control or patents determine number of rms N in the longrun So number of rms is xed and more rms can t enter Firms compete by undermining each other s prices B Solve for same TC functions 1 Set PMCi 2 Invert to get qisfP using MCi 3 Find Qs by multiplying number of oligopolists by function qis 4 Set QsQd 5 Solve P by plugging in to Qd qi by plugging in to qis function Q by Nqi C Solve for different TC functions 1 Set PMC1 and PMC2 2 Invert to get qls and q2s using MCI and MC2 respectively 3 If market price is between the 2 starting prices only the rm with smaller starting point produces Qsqxs where X is the rm number If market price is above the rm with higher starting price both will produce Qsq1sq2s 4 First assume that both rms produce if P is less than rm with higher starting price then other rm s little q will turn out negative 5 Set QsQd and solve for market price and each rm s level of output and market output q1q2 VI Stackelberg Model A Concepts Leader rm can set its output before its rival follower when leader enters market rst Leader foretells what follower will do Before the follower does anything the leader will deceive him by choosing its output level Leader makes more while rivals shrink Follower believes leader will hold quantity constant B Solve for 2 rms with same TC function 1 Assume rm 1 is leader and rm 2 is follower 2 Find follower s reaction function q2fql same as Cournot 3 Pro t2 PQq2 TC2 Qq1q2 4 Derive pro t2 by setting ql constant and optimal pro t equal to 0 5 Get equation q2fql 6 Do the same for the leader s problem but plug q2 into rm 1 s pro t equation rst before deriving 7 You will nd that there is a Stackelberg effect when negative becomes positive 8 Derive pro t function of rm 1 and set it equal to 0 9 Solve for ql q2 by plugging in to its reaction function Q and P 10 If they have different total cost functions just change the TCs VII Monopolistic Competition Competitive Fringe A Concepts Other rms copy price of one rm Large rm acts as monopolist while small rms are pricetakers Charge prices above marginal cost Elasticity of residual demand curve gets smaller as monopolistic competitive rms decrease B Solve for given amount of rms 1 Find qid by simplifying the function QdN 2 Find inverse demand Pfqid 9 each rm s inverse demand 3 4 5 Set MRiMCi Solve for qi Q qiN P use each rm s inverse demand No rms will enter if pro t is greater than 0 so not in long run C Solve for one large rm and 2 small rms l OOOUlIgtUJN Set PMCs Find qs fP Multiply 2qs to nd Qs Find dominant rm s residual demand QDL QdQs Find inverse demand PL fQL Proceed as monopolist Set MRLMCL and solve for QL Find P by plugging in Q to QD function 9 Solve for qs little rms by plugging in P into the qs function 10 QQLQs VIII Cartel Method A Concepts Work together to raise pro ts Changes in one rm s output affects pro ts of all members in cartel Solves like multiplant monopolist B Solve for N rms with one TC function l 2 3 4 Set MRQMCqi where Q is Nqi Solve for qi Solve for Q by Nqi Solve for P by plugging in to inverse demand function C Solve for two rms with 2 different TC functions 1 Set MRQMC1MC2 Set MCql MCq2 Solve for q2fql Set MRQMC1 knowing Qqlq2 and plug in for q2 Solve for ql Solve for q2 Solve for Q by adding ql and q2 and P by plugging in to inverse demand OOOUlIgtUJN IX Auctions Find inverse demand A EnglishAmerican Stvle Bids start small and rise by some increment Bidder with the highest reservation price will win B Dutch Style Bids start high and fall by some increment We don t know who wins C Sealed Bid Bids are predetermined and are locked in These bids have to be sent in by a certain deadline The highest bidder could either pay highest bid price firstbid auction or pay the second highest bidder s price secondbid auction Encourages bidders to bid true reservation price D Electronic Auction Ex eBay There is a deadline There are problems with auctioning online 1 Sniping many people bid at last minute 2 Shilling there could be false buyers X Auction Values A Unique Value Auction Bidders have different reservation prices for different items Ex art and antiques B Common Value Auction All bidders agree on one price and they have to estimate the costs Over time changes are actual prices are close to the median Winners curse bidders love the feeling of winning and end up bidding too much and paying more than what it s really worth XI Asymmetric Information There could be false advertisements causing buyers to not know true quality of a product There could be different available prices that buyers don t know about Examples 0 Online prices may no longer be consistent o Shops that sell overpriced items to tourists 0 Company creates different names for same product model so that buyer will not be able to find the item with same name at a different store can t comparison shop XII Game Theory Firm B Strate l Strate 2 Strate 3 Firm A 7 6 1 2 399 399 l3 67 511 35 210 47 How to find if Firm A or B has dominant strategy For Firm A look at the first numbers vertically by column 0 Out of 7 l 3 which one is greatest 7 0 Out of l 6 2 which one is greatest 6 0 Out of 9 5 4 which one is greatest 5 I There is no dominant strategy since in once of them A chooses strategy 1 and two others A chooses strategy 2 For Firm B look at the second numbers horizontally by rows 0 Out of 6 2 9 which one is greatest 6 0 Out of 3 7 llwhich one is greatest 11 0 Out of 5 10 7 which one is greatest 10 I There is no dominant strategy since B chooses strategy 1 2 and 3 How do you use maximin approach For Firm A look at the first numbers horizontally by rows 0 Out of 7 l 9 which one is the least 9 0 Out ofl 6 5 which one is the least 1 0 Out of 3 2 4 which one is the least 2 I The greatest out of the three is 2 For Firm B look at the second numbers vertically by column 0 Out of 6 3 5 which one is the least 3 0 Out of 2 7 10 which one is the least 7 0 Out of 9 ll 7 which one is the least 9 I The greatest of the three is 3 Now nd the initial outcome Firm A chooses Strategy 3 and Firm B chooses Strategy 1 0 Their initial outcome is S3 81 with payoffs 35 Is this Nash equilibrium 0 No because A wants to switch to 81 because 7gt3 B wants to switch to S2 because lOgt5 0 Now they are at 81 S2 with payoffs 12 where they are both worse off 0 Result Cycle back and forth Is there any Nash equilibrium at all 0 Yes at 81 81 with payoff 76 and 8283 with payoff 51 l XIII Factor Markets for Inputs The main difference between factor markets and product markets is that in factor markets individuals provide labor to businesses and business provide money wages to the individuals The market is now the demand and the individuals become the supply In factor market graphs the demand is downward sloping due to diminishing marginal productivity of labor MPL This means that the more workers rms hire the more problems will occur This could be due to lack of space to move around and do work MRP is demand The rm s supply is perfectly competitive market and equals the wage or MRC If the demand for input increases the resources required in production also increases Factor markets in industry usually hire at equilibrium and individual rms hire at MRPMRC XIV Imperfect Competition in Factor Markets Market output can be monopolized to form Cartel or oligopoly As a result they don t need as much inputs An input buyer can be a monopoly or oligopsomy Therefore less quantity is incurred Input supply can be controlled by monopolist or in a Cartel Quantity decreases as price rises XV Marginal Revenue Product MRP Additional revenue of a rm from additional unit of labor It can be solved by Marginal Product X Price XVI Marginal Resource Cost MRC Additional cost obtained from additional unit of input or cost of hiring another worker It can be solved by change in wage divided by number of workers hired XVII Monoposony Imperfect competition in factor market An example is when there is only one major employer in a small town and a lot of workers seeking for a job Since there s only one major employer in that area the employer has power to manipulate the market by setting wages and choosing its own number of employees Opposite of Monopoly Firm may hire more at lower wage and less at higher wage XVIII Externalities Sideeffects They can be addressed in three different ways 0 Taxes or subsidies o Standardsregulations o Transferable permits It can be internalized 0 Ex farmer produces crops that also produces organic ingredients

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