Study guide for the final
Study guide for the final ECO 211
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This 7 page Study Guide was uploaded by Dannit Cohen on Tuesday December 8, 2015. The Study Guide belongs to ECO 211 at University of Michigan taught by David Spigelman in Fall 2015. Since its upload, it has received 326 views. For similar materials see Econ Principles and Problems in Economcs at University of Michigan.
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Date Created: 12/08/15
ECO 211: final Chapter 17: oligopoly Oligopoly o Because an oligopolistic market has only a small group of sellers, a key feature of oligopoly is the tension between cooperation and self-interest. o The oligopolists are best off when they cooperate and act like a monopolist—producing a small quantity of output and charging a price above marginal cost. o Yet because each oligopolist cares only about its own profit, there are powerful incentives at work that hinder a group of firms from maintaining the cooperative outcome. Cartel: group of firms that get together to form a monopoly o In the US an economic cartel is illegal. Is illegal for firms to collude (control prices and quantity). Firms can’t get together and discuss their level of output, and the price. We regulate cartels to increase welfare o OPEP= the most famous cartel. o Cartels will: Restrict the output Raise the prices o Will cartels there is always a welfare lost Two conditions to make easier to a cartel to operate o 1) Homogeneous products o 2) Few firms Cartel Perfect competition Monopolistic competition P>AC P=AC P>AC Nash equilibrium: equilibrium that results when players optimize what is best for themselves and expect that the other players also do what is best for them. Cournot: type of Nash equilibrium that results when the players chose the quantity of output o Type of Nash equilibrium o Call Nash in quantity o If firms chose the level of output is cournot. o More is better o Every cournot equilibrium is a Nash equilibrium, but not every Nash equilibrium is a Cournot equilibrium. The prisioners dilemma: a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial o Not cournot problem o Bonnie If Clyde confess, Bonnie confess If Clyde remain silent Bonnie confess. Bonnie has a dominant strategy of confess. o Dominant strategy: when a character always do the same. o Clyde If Bonnie confess Clyde confess. If Bonnie remains silent, Clyde confess. Clyde has a dominant strategy of confess. o If both have a dominant strategy of confessing, the Nash equilibrium is confess-confess. Nash equilibrium is at the north west: confess-confess o If there is a square where both players are better off, the reason why they didn’t get there is because they couldn’t collude. o Not Cournot: o o Us If the Soviet Union chooses to arm, the United States is better off doing the same to prevent the loss of power (decides to arm). If the Soviet Union chooses to disarm, the United States is better off arming because doing so would make it more powerful. The US has a dominant strategy of arming. o Soviet Union If the US chooses to arm, the Soviet Union is better off doing the same to prevent the loss of power (decides to arm). If the US chooses to disarm, the Soviet Union is better off arming because doing so would make it more powerful. The Soviet Union has a dominant strategy of arming. o Nash equilibrium: arm-arm- at the north-west o Cournot problem: if the players are trying to set a level of output o o jack: if Jill goes high Jack goes high if Jill goes low Jack goes low Jack has a dominant strategy of going high o Jill If Jack goes high Jill goes high If Jack goes low Jill goes high Jill has a dominant strategy of going high o Both have a dominant strategy of going high Nash equilibrium: goes high-goes high Cournot equilibrium: goes high-goes high o Cournot equilibrium o o Texaco If Exxon drills two well, Texaco will drill two well. If Exxon drills one well, Texaco will drill two well. Texaco dominant strategy: drill to well. o Exxon If Texaco drills two well, Exxon will drill two well. If Texaco drills one well, Exxon will drill two well. Exxon dominant strategy: drill to well. o Cournot equilibrium: drill two well-drill two well: North West. o The place where both players are better off is at the south-east. They aren’t there because they can’t collude. Chapter 18: poverty VMPL= PxMPL= Px ∆???? ∆???? o MPL=marginal product labor. o VMPL=marginal benefit Three things countries should allowed: o Domestic saving o Foreign investments o Foreign Aid What kind of country uses foreign aid? o Desperately poor countries (ex: African countries) What kind of country uses foreign investment? o China How did China get its economic growth started? o Allowing foreign investments o Allowing private industries Which countries have the highest GDP? o Western European countries and Scandinavian countries. Less inequality, but more unemployment, and slower growth. HK, T, K will raise PxMPL, so VMPL will increase, and the wages also will increase. o HK: education o PH: physical capital o T: technology What would do the firm to optimize? o Marginal cost=wage How can we improve the standard of living? o The US should reduce the corporate tax. o Should invest in education. What would be a technique to reduce poverty in America? o Credit for firms to locate in areas with poverty o Create incentives for taxes in poor areas Marginal benefit > marginal cost o So that they become equal. If we raise the main wage, unemployment results The goal to reduce poverty in a market oriented economy is to raise the wage. o If we want to raise the wage we need to raise : PxMPL=VMPL=wage Chapter 20: Income and equality o Us income and inequality: Distribution of income: Align (alinear) families by income Divide all families into five equal groups. Same numbers of families in each group. Different incomes o Bottom fifth 4% of all income. o Top fifth 47.8% of all income. Trends in income distribution: 1935-1970: more equal distribution 1970-2008: more unequal distribution Causes: Increase in international; trade with low-wage countries. Changes in technology PD: You can have negative income tax: another way to subsidize people. o Taxes: Progressive tax: when you tax rich people. Regressive tax: when you tax poor people. Chapter 21: Theory of consumer choice Assumptions of the theory o 1) More is better o 2) People can rank preferences o 3) Preferences are transitive or consistent: if you like A better than B, an better than C Indifference curve: all the combinations of A and B that give the consumer a fixed or certain level of utility (pleasure of satisfaction). o Utility remains constant o The consumer wants to be move to the north-east. The assumptions are violated: o C is preferred to D, but they are in the same indifferent curve- inconsistent. o Positive slope o Violates the principle of more is better las assumptions se cumplen: o Indifference curves can be straight line. o More is better. o Negative slope. o Perfect substitute: any straight line that have negative slope and allows the assumptions. The assumptions are not respected The assumptions are not respected The assumptions are not respected The assumptions are respected names of slope o MRS: marginal rate of substitution o Slope of budget restraint o MRT: marginal rate of PD: If you have a convex to origin indifferent curve and you have unique points of tangency between one of the convex to origin and budget constraint that will reach the consumer’s optimum. The consumer’s optimum o The consumer choses the point on his budget constraint that lies on the highest indifference curve. o At this point, called the optimum, the marginal rate of substitution equals the relative price of two goods MRS=MRT If there is a tangent point between the convex to origin of the indifference curve and the budget constraint, then MRS goals to MRT. Goods o Inferior but not giffen goods: if your income goes up, you consume less. o Normal good: if your income goes, you consume more o Giffen: if your income goes down, you consume more. Goods type problem o Two rules for substitution effect 1) Always at the initial indifference curve. 2) Always go towards the good is getting cheaper. o A to B: substitution effect o B to C: income effect Income effect: the change in income, but prices remain the same. Is parallel to the Y-axis To the north-east: income goes up: to the left To the origin: income goes down: to the right. In the problems where the income goes down, a normal good is at the left. o A to C: total effect Laborism problem o Leisure is a good o Curve could till up if: 1) Cut tax rates. 2) wages: races o The wage is the cost of leisure. If wages go up, leisure gets more expensive If wages go down, leisure gets cheaper. o Hardest type of prob What have to be true about leisure if you cut taxes, in order to make people work harder 1)leisure should be inferior 2) Leisure should be normal but the income effect will be smaller than the relative substitution effect. This means, that people will work the same amount of hours regarding if the tax was cut or not. o If the problem states that you win the lottery, or you receive other benefit. It will represent a parallel shift of the budget constraint, and it will not affect the wages. o Wages: If the wage goes up, also tills the curve up If the wage goes down, also tills the curve down. o Tax rates: If the tax rates goes down, will till the curve up. If the tax rates goes up, will till the curve down. o Problem o Where is the substitution effect? There is no substitution effect. o Which is the income effect? The income effect is normal because goes to the right. (If the income effect goes to the left is inferior.
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