Econ Week 13
U of M
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This 5 page Class Notes was uploaded by Emma Norden on Sunday December 6, 2015. The Class Notes belongs to Econ 1101 at University of Minnesota taught by Thomas Holmes in Fall 2015. Since its upload, it has received 26 views. For similar materials see Principles of Microeconomics in Economcs at University of Minnesota.
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Date Created: 12/06/15
1 13015 Game Theory Oligopoly is between monopoly and perfect competition Gain for the group to act like a monopoly hold back production of oil to raise price each gets a production quota Gain for individual firm Deviate from agreement and secretly sell more at a higher price Prisoner s Dilemma Robinson and Friday have been caught trying to steal widgets from S4 They have been brought in for separate questions Two actions are confess or remain silent Payoff Matrix If both stay silent both get 1 year in jail If Friday confesses and Robinson remains silent Friday gets 0 years and the Robinson gets 20 and vice versa When both confess they both get 8 years Strategy Rule for how a player behaves Friday considers if Robinson stayed silent or confessed If Robinson stays silent Friday is better off confessing If Robinson confesses Friday is better confessing as well Nash Equilibrium Player 1 s strategy is optimal for him or her regardless of how other player behaves Confessing is Friday s dominant strategy Confessing is also Robinson s dominant strategy Both end up confessing and both get 8 years in jail 0 If both could stay silent it would be Pareto Efficient 12215 The Battle of the Sexes Tb attleeft Sexes quot 39 r ateh Penman 39 39 39 m eauF gets 3 an a Mlgete 11 IE n Suppose the We players simultapeeuely make their eheiee Let s gure put the optimal strategy fer each player There is no dominant strategy optimal strategy depends on what other person does Multiple Nash equilibria Both watch football both watch yes to the dress First Mover Advantage Person who makes decision first will get their way if second person chooses the optimal Ex If girl sends text telling guy she s watching yes to the dress guy will choose to watch it with her Alternative scenario Before girl sends text guy makes deal with friends not to watch yes to the dress or they defriend him on Facebook and he loses 10 Guy will choose to watch football no matter what If girl knows about pact she will watch football Guy will make pact with friends because he wants this outcome Mixed Strategy randomize Ex Rock paper scissors Nash equilibrium 13 chance you will lose 13 chance you will win 13 chance you will tie Doesn t matter what you do Cartels more likely to work if 1 Interaction is frequently repeated and participants care about the future 2 Few players 3 If players can quickly react Ex Two gas stations across from each other can lower price quickly if they see other one has lowered price 4 More favorable legal environment Econ 1101 Week 13 113015 Chapter 17 Oligopoly Oligopoly A market where only a few sellers offer similar or identical products Actions of one seller has huge impact on profits of other sellers Profit depends on how much firms choose to produce Better off when all firms cooperate and act as a monopolist producing small amount of output and charging price above marginal cost Often hard to do because firms only care about their own profit Game theory How people behave in strategic situations Collusion Agreement among firms about the quantity that will be produced and price that will be charged Cartel Group of firms acting in unison If such an agreement happens market would behave as if there is a monopoly Must agree on how to split monopoly production ex If 60 gallons of water total is agreed upon quantity of production how will 2 firms decide to split it can make it hard for cartels to reach agreement Nash equilibrium situation where firms interacting with each other choose their best strategy given the strategies chosen by other firms Oligopolists are better of cooperating Instead they follow their selfinterest monopoly outcome is not reached and joint profit is not maximized As firms each try to raise production to gain more profit total production rises and price falls Thus in terms of quantity produced perfectly competitive market gt Quantity produced in oligopoly gt monopoly And price Competitive market lt price in oligopoly lt monopoly Page 351 Prisoners Dilemma page 353 provide good example of this also page 355 As more firms join each faces a decision in how much to produce Output effect Because price is above marginal cost selling on emore gallon of water at going price will increase profit Price effect Raising production will increase total amount sold lowering price of water and lowering profit on all other gallons sold As oligolopy grows impact of price effect falls and market begins to looks more like it would if it was a competitive market Dominant strategy best strategy for player to follow regardless of the decision of others Instead of cooperating firms are driven by selfinterest if firms all choose dominant strategy everyone is worse off Ex Two oil companies own adjacent oil fields under which a pool of oil worth 12 million lies If each company drill one well oil is split 5050 and each will get 6 million 1 million from cost of drilling 5 million in profit If one company drills 2 wells they get 23 of oil thus drilling 2 wells is dominant strategy for both companies Both companies end up drilling 2 wells so 6 million 2 million 4 million In some cases oligopolists failing to cooperate is bad for society as well as bad for firms EX US and Soviet Union starting armsrace If oligopolists maintain monopoly outcome is good for oligopolists but bad for society When oligopolists fail to cooperate quantity produced is closer to optimum so society is better off Cooperation among oligopolists is undesirable production too low prices too high Antitrust laws Applied by policymakers to regulate behavior of oligopolists that reduces competition Some behavior that may seem to reduce competition have legitimate business reasons Three controversial examples of behavior that antitrust laws might try to prohibit Resale Price Maintenance If a producer sells a product to retail stores for 100 and requires the stores to charge customers 150 it is called resale price maintenance A retailer who sold less would be violating that agreement Predatory Pricing EX There s a monopoly and then another rm joins the market In order to regain monopoly firm cuts prices Tying Offering two products for a single price instead of selling individually Page 361 Chapter 18 The Markets for the Factors of Production Factors of production inputs used to produce goods and services Labor land and capital are three most important Firm s demand for factors of production is a derived demand ie demand for gash station attendants labor is directly linked to supply of gas The Demand for Labor For a firm to make its hiring decision it must consider how of workers affects quantity produced Consider the apple firm Ma ginall Value of the F39reduet Marginal Precinct alarm utpm f Latinr of Latin Wage Marginal Profit L Equot MFL it it FMFL F 2 33 MEL 1 F39lr ffit WHFL r W Ii wnr39kars El quotmammals l bushels 1 UDG EEUG 533 1 EH EU Eli BEECH EDD 3 ll EEC EDIE IUD E 241113 ifl d 50E ll39l 51 SEQ 2152 EDD 3 E BEE Production function describes relationship between quantity of inputs apple pickers and quantity of outputs apples When of workers increases from 1 to 2 output increases from 100 to 180 bushels Marginal product of labor is 80 Diminishing marginal product as of workers increases marginal product of labor declines Value of marginal product marginal product of an input in this case labor multiplied by price of output Ex If additional worker produces 80 apple bushels and price is 10 8010 800 Marginal revenue product extra revenue firm gets from extra unit of a factor of production Firm will hire workers up to point where value of marginal product of labor equals wage Value of marginal product curve is the labor demand curve for a competitive profit maximizing firm Page 377 Labor demand curve can shift by Output price Technological change labor saving marginal product of labor is reduce by technology curve shifts left labor augmenting technology increases marginal product of labor increasing labor demand and shifting curve right The Supply of other factors Quantity available of one factor of production can affect marginal product of other factors Ex Limited amount of ladders will reduce marginal product of apple pickers LaborSupply curve can shift by Changes in Tastes The norm used to be that women stayed at home when that attitude changed and women joined work force supply of labor increased Changes in Alternative Opportunities Supply of one labor market depends on opportunities in another labor market Ex If pear pickers have higher wages apple pickers my switch over Immigration When immigrants come to US labor supply increases Labor supply and labor demand determine equilibrium wage Wage adjusts to balance supply and demand of labor Wage always equals value of marginal product of labor Other Factors of Production Land and Capital Capital equipment and structures used for production Ex Apple firm as capital stock of ladders trucks to transport apples buildings for storage and trees Firms use same process of determining how much labor to hire to figure out how much land and capital to buy Firm increases quantity of land and capital until value of factor s marginal product equals factor s price Rental price price person pays to use factor of production for limited time Equilibrium rental income equals value of factor s marginal product Purchase price price person pays to own factor of production indefinitely Depends on both current value of marginal product and future value of marginal product Marginal product depends on quantity that is available of that product Supply of a factor falls equilibrium price rises An event that changes supply of any one factor of production can alter earnings of all other factors Page 389 Neoclassical theory of distribution Amount paid to each factor of production depends on supply and demand for that factor Demand depends on that factor s marginal productivity In equilibrium each factor earns value of its marginal contribution to production of goods and services