INTRODUCTION TO MICROECONOMICS
INTRODUCTION TO MICROECONOMICS ECO 304K
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This 5 page Class Notes was uploaded by Rossie Green PhD on Monday September 7, 2015. The Class Notes belongs to ECO 304K at University of Texas at Austin taught by David Sibley in Fall. Since its upload, it has received 51 views. For similar materials see /class/181842/eco-304k-university-of-texas-at-austin in Economcs at University of Texas at Austin.
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Date Created: 09/07/15
H N U 5 Study Topics for Midterm 3 Learn all definitions in chapters 1314 15 through p 321 and 16 through p 341 For the purposes of this exam definitions are only those terms printed in bold in the margins of the pages If I give you a specific linear demand curve be able to write the corresponding marginal revenue curve Be able to find the output and price at which monopoly profits are maximizedMRMC raises production as long as MR is greater than MC and Price is where that point correlates on the demand curve Be able to discuss briefly the social costs of monopoly deadweight loss rentseeking behavior and Xinefficiency Be able to calculate deadweight loss from monopoly pricing a Deadweight oss loss that occurs when a monopoly is able to produce less at a higher price than a competitive firm Consumer surplus shrinks and their loss exceeds the monopoly s gain aka social welfare ossUnreaized gains in total surplus clue to price being above marginal cost Rentseeking behavior actions taken by households or firms to preserve economic profits The monopoly may push government to impose restrictions on competition to make it hard to enter market Problems with this are consumption of resources government failure as in government becomes a tool of the rent seeker and allocation of resources is less efficient than before Xinefficiency firm may behave inefficiently because there are bureaucratic costs involved in efficient behavior It may be costly to 039 O motivate worker performance and to make sure that investments are carried out efficiently for example It may be very comfortable for the employees of a company to work only moderately hard and to avoid seeking out costcutting measures Faced with tough competition those employees would be forced to become efficient or else the firm goes under This inefficiency clue to lack of competitive incentives to be efficient 5 Briefly describe the sources of monopoly power a Patent government rules ownership of a factor of production network affects 6 Give five examples of price discriminationcharging different prices to l 00 different buyers for identical products a 090 Airlines routinely charge those who stay over Saturday nights a lower fare than those who do not Business travelers generally travel during the week and are often unwilling to stay Saturdays so they will pay more for their ticket Movie theaters charge less for elders of elderly and children Universities charging more for outofstate residents Sometimes places charge a lower price if you buy more Ex bookstores Some businesses charge their regular customers less because they send them coupons Describe the two main sections of the Sherman Act giving the conduct at which each section is aimed and giving the criteria for guilt or innocence for each per se rule for Section 1 and rule of reason for Section 2 m 039 Section 1 quotevery contract combination in the form of trust or otherwise or conspiracy in restraint of trade or commerce among the several states or within the foreign nations is hereby declared illegal blatantly obvious attempts by a company or individual to constrain the free market Section 2 Every person who shall monopolize attempt to monopolize or combine r conspire with another person to monopolize trade among states shall be deemed guilty of a misdemeanor Rule of reasoncriteria introduced by the Supreme Court to determine whether an action was illegal or legal within terms of the Sherman Act Your book lists three types of business conduct covered by the Clayton Act What are they and what do they involve a b It made tying contracts illegal These contracts force a customer to buy one product to obtain another Limits mergers that would quot substantially lessen competition or tend to create a monopoly c Banned price discrimination charging customers different prices for reasons other than changes in cost or matching competitor s prices rarely enforced 9 What does the term quotmarket powerquot mean a A firm has market power when it exercises some control over theprice of its output or the price of the inputs that it uses 10 What are the quotfive forcesquot identified by Porter a Model developed by Michael Porter that helps us understand the five competitive forces that determine the level of competition and profitability in an industry b lndustry competitors Potential entrants Substitutes Buyers Suppliers 11What is a patent troll a Derogatory phrase for an entity that neither invents nor makes products but instead acquires patents and uses them to extort money from legitimate businesses by suing or threatening to sue 12How do you distinguish cartel behavior from tacit collusionA cartel is a group of firms that gets together and makes joint price and output decisions to maximizejoint profits OPEC These price and quantity fixing agreements are explicit ln Tacit collusion price and quantity fixing agreements among producers are implicit Tacit is easier for fewer and more similar firms 13What conditions must be present for a cartel to work well a Demand for the cartel s product must be inelastic If any substitutes are available the cartel s price increase may become selfdefeating because buyers will switch to substitutes b Members of the cartel must play by the rules If a cartel is holding up prices by restricting output there is a big incentive for members to cheat by increasing output Breaking ranks could mean temporary huge profits c Entry into the industry by noncartel members must be difficult 14 What is the price leadership modeDoes it attain the monopoly price It s a form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy It does not obtain the monopoly price because the dominant firm has to take into account its consumers as well as the existence of the smaller firms It sets a price between a monopolist and competitive firm 15 From figure 138 on p281 figure out what the demand curve facing the monopolist is The using the discussion on p299 and in Figure 142 be able to write down the equation for Firm B s best response function and Firm A s best response function Hint it s posted on blackboard in notes I wrote up Calculate the Cournot equilibrium price in Figure 142 Based on the equilibrium outputs I know this is a very hard question and it may show up only as extra credit but it s a great mental exercise to go through this 16n a Cournot duopoly is the equilibrium price below the monopoly price To see take the demand curve implicit in Figure 142a which comes from figure 138 and substitute the Cournot quantity into the demand curve to get the price Is the equilibrium price above the perfectly competitive level Answer this by looking at Figure 142a a It is above monopoly price and equilibrium price 17Be able to define dominant strategy Nash equilibrium titfortat strategy Dominant strategy in game theory a strategy that is best no matter In what the opposition does Nash equilibrium in game theory the result of all players playing Pquot their best strategy given what their competitors are doing 0 Titfortat strategy a repeated game strategy in which a player responds in kind to an opponent s play 18Be able to look at a 2x2 payoff matrix and see if there are any dominant strategies available to either player 19Be able to find Nash equilibrium if there are any 20 What is the HHI Calculate it for any given set of market shares a Herfindahl Hirschman lndex index of market concentration by summing the square of percentage shares of firms in the market 21 What is the legal test for whether a merger does or does not violate the Clayton Act What is the CellerKefauver Act a If the HHl is less than 1000 the industry is considered unconcentrated and any proposed merger will go unchallenged b lfthe index is between 1000 and 18000 the department will challenge any merger that would increase the index by over 100 points c HHl above 1800 mean that the industry is considered concentrated already and the Justice Department will challenge any merger that pushes the index up more than 50 points Celler Kefauver Act extended the government s authority to control mergers and enabled the Justice Department to monitor and enforce the provisions of the Clayton Act 22 What are the correct numbers in Figure 147 23 What are the horizontal merger guidelines and who publishes them In context of these guidelines how does quotcoordinated interactionquot relate to tacit collusion It was published by the Justice Department and the FTC updating and expanding the 1984 HHl merger guidelines Coordinated interaction means actions by a group of firms that are profitable for each of them only as the result of the accommodating reactions of others This behavior includes tacit or express collusion and may or may not be lawful in and of itself 24What are the characteristics of a monopolistically competitive industryLarge number of firms no barriers of entry and product differentiation 25What is product differentiation and why do firms engage in itProduct differentiation is a strategy that firms use to achieve market power by producing goods that differ than others in the market It occurs in response to demands by consumers for products that meet their individual needs and tastes constrained by the forces of costs of coordination and scale economies 26 What is the point of the anecdote on p 317 about Draeger s grocery a Experiment set up in Draeger s grocery store set up two booths one had 6 differentjams and the other had 24 More people went to try jams at the booth with 24 However more people boughtjam from the both with only 6 This proved while some choice is highly valued by consumers too much choice can reduce purchases 27Why do people buy ice creamin small containers but vitamins in large ones see pp 317 318 What is commitment device 0
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