Chapters 11, 12, 13

Question 1

Price Discrimination

Answer 1

occurs when a firm sells same good or service at different prices to different groups of customers

Question 2

perfect price discrimination

Answer 2

occurs when a firm sells the same good or service at a unique price to every customer

Question 3

monopolistic competition

Answer 3

type of market structure characterized by free entry, many different firms, and product differentiation

Question 4

product differentiation

Answer 4

a process that firms use to make a product more attractive to potential customers

Question 5

markup

Answer 5

difference between the price that firm charges and the marginal cost of production

Question 6

excess capacity

Answer 6

occurs when a firm produces at an output level that is smaller than the output level needed to minimize average total costs

Question 7

Oligopoly

Answer 7

form of market structure that exists when small number of firms sell differentiated product in market w/ high barriers to entry

Question 8

concentration ratios

Answer 8

a measure of oligopoly power present in the industry

-most common measure “four-firm concentration ratio”

Question 9

duopoly

Answer 9

industry consisting of only two firms

Question 10

collusion

Answer 10

agreement among rival firms specifies prices each firm charges and quantity it produces
-illegal in US

Question 11

artel

Answer 11

small group of two or more firms that act in unison

Question 12

antitrust laws

Answer 12

attempt to prevent oligopolies from behaving like monopolies

Question 13

mutual interdependence

Answer 13

market situation where actions of one firm have an impact on the price and output of its competitors

Question 14

Nash equilibrium

Answer 14

occurs when all economic decision-makers opt to keep the status quo

Question 15

price effect

Answer 15

reflects how change in price affects the firm’s revenue

Question 16

output effect

Answer 16

occurs when change in price affects the number of customers in market

Question 17

game theory

Answer 17

branch of mathematics that economists use to analyze strategic behaviors of decision-makers

• determine what level of cooperation most likely to occur
• consists: set of players, set of strategies available, the specification of payoffs for each combination of strategies
• usually represented by playoff matrix

Question 18

prisoner’s dilemma

Answer 18

occurs when decision-makers face incentives that make it difficult to achieve mutually beneficial outcomes

Question 19

dominant strategy

Answer 19

exists when a player will always prefer one strategy, regardless of what his opponent chooses

Question 20

Tit-for-tat

Answer 20

long run strategy that promotes cooperation among participants by mimicking opponent’s most recent decision with repayment in kind

Question 21

backward induction

Answer 21

game theory is process of deducing backward from the end of a scenario to infer a sequence of optimal actions

Question 22

decision tree

Answer 22

illustrates all of possible outcomes in a sequential game

Question 23

Sherman Antitrust Act

Answer 23

(1890) first federal law limiting cartels and monopolies

Question 24

Clayton Act

Answer 24

(1914) targets corporate behaviors that reduces competition

Question 25

Predatory pricing

Answer 25

occurs when firm deliberately set their prices below average variable costs w/ intent of driving rivals out of market

Question 26

network externality

Answer 26

occurs when number of consumers who purchase or use a good influences the quantity demanded

Question 27

switching costs

Answer 27

costs incurred when a consumer changes from one supplier to another

Question 28

kinked demand curve

Answer 28

theory states that oligopolists have a greater tendency to respond aggressively to rivals’ price cuts but will largely ignore price increases

Question 29

price leadership

Answer 29

occurs when a dominant firm in industry sets the price that maximizes profits and smaller firms in industry follow by setting their prices to match price leader