ECON Exam 3

Question 1

rent-seeking behavior

Answer 1

attempts by firms to get special treatment from the government in order to maintain Monopoly control. Increases cost –> profit decreases in short term

An EXCEPTION in Monopoly systems

Question 2

what does “rent” mean in a general sense?

Answer 2

any payment to a resource above it’s opp cost

Question 3

Price discrimination

Answer 3

figuring out who you should charge higher or lower prices to in order to max profit

• can charge differently for diff quantities (BOGO) / or for diff groups of ppl (student, senior citizen discounts)

EASIER in a monopoly (less comp) but not required

Question 4

Price discrimination: requirements

Answer 4

1. Have to be able to identify diff groups

2. Have to be able to prohibit resale (ex. A student buying at discounted price, v reselling for much higher)

Question 5

Price discrimination: 3 types

Answer 5

1. Perfect: most extreme, every customer charged a diff price = to their marg benefit
   
   • ex. insurance, cars
   • NO DWL
     
     • A perfect price discriminating monopoly produces the same quantity of output as a perfectly competitive market.
2. diff prices for diff quantities: less elastic D
3. diff prices for diff groups:

Question 6

natural monopoly

Answer 6

• where it’s cheaper for just 1 firm to produce everything

- The monopolist charges a price below its average cost of production

Question 7

what are characteristics of monopolistic competition? (4)

Answer 7

1. LOTS of firms –> low HHI, CR
2. products across firms are a little diff from each other
   
   • diff in price, quality, marketing (advertising + packaging ex. celebrity), location
3. Demand is elastic / NOT price-takers / Demand w very low slope [flat] / MR is 2x slope of D curve
4. no barriers to entry

Question 8

monopolistic competition - where is max profit?

Answer 8

• max Prof where MR = MC

Question 9

game theory - what is the prisoners dilemma?

Answer 9

• 2 suspects, both committed crime, questioned separrately

1. can confess / or deny

Question 10

what is a cartel?

Answer 10

• a group of firms in an oligopoly that agree to act like a monopoly (able to limit​ output, raise​ price, and increase economic profit.)
  * ex. drugs, OPEC (oil),
• requires repetition and punishment for maintenance (so that people don’t cheat)

Question 11

what when there’s no dominant strategies?

Answer 11

1. coordination game
2. game of chicken
   • research and development; results are shared (Ex. a new tech is developed, and not patented, other co’s can co-opt it)

Question 12

monopolistic competition - what is excess capacity?

Answer 12

• occurs when a firm produces below it’s “efficient scale” (min of avg total cost)
• amount by which the efficient scale exceeds the quantity that the firm produces.
• p294

Question 13

monopolistic competition - what is markup?

Answer 13

• markup is the amount by which price​ EXCEEDS MARGINAL COST

Question 14

monopolistic competition - where is economic profit/loss?

Answer 14

• space in between Demand and ATC curves to Y axis (Rectangle)
• if D is above ATC –> PROFIT and viceversa

Question 15

oligopoly: what is game theory?

Answer 15

• way of studying strategic behavior; used to study oligopoly

Question 16

oligopoly: game theory - what is a Nash equilibrium?

Answer 16

• Prisoner’s dilemma
• Player 1 makes the best decision based on player 2’s actions, Player 2 makes the best decision based on player 1’s actions
• Nash equilibrium delivers a bad outcome for both players because​ the best option for both is to​ confess, and both prisoners confess.
  This outcome is worse for both prisoners than if they each denied the​ crime, which creates the dilemma
• there can be more than 1 in a game!

Question 17

oligopoly: game theory - what is dominant strategy equilibrium?

Answer 17

• Prisoner’s dilemma

Question 18

oligopoly: game theory - why do firms in a collusive agreement have motive to cheat?

Answer 18

• All firms in a collusive agreement face the same strategies.
  Their payoff is high if they all​ comply, but the payoff to any one firm that cheats is even higher if all the other firms comply.
  This motivates each firm to cheat on the agreement.

Question 19

what is a contestable market?

Answer 19

• A contestable market is a market in which firms can enter and leave so easily that firms in the market face competition from potential entrants.