Exam 2 Flashcards
How do you calculate marginal cost in a perfectly competitive market?
MC = change in TC / change in Q
What are the key conditions of a perfectly competitive market?
Price taking - prices must be at market rate
Product homogeneity - product exactly the same among different firms
Free entry - no barriers to enter the market
How do you calculate average total cost in a perfectly competitive market?
ATC = TC / Q
In a perfectly competitive market, what two curves are equal?
Marginal cost curve and supply curve
What affect does an individual firm’s decision have on the overall market In a perfectly competitive market?
No affect on overall market as each firm has only a small share of the market
In a perfectly competitive market, a firm should shut down the business if what condition exists in the short run? When should they stay open?
P>AVC –> stay
P shut down
What happens in a perfectly competitive market where firms are losing money?
Firms that are losing money will shut down. This will cause the supply curve to shift left and the price to increase which will then cause remaining firms to be more profitable. This will occur until a long run equilibrium has been reached.
What happens in a perfectly competitive market where firms are making money?
Firms will enter the market. This will cause the supply curve to shift right and the price to decrease and encourage firms to close until the long run equilibrium is reached.
What is the economic profit if all perfectly competitive firms?
Zero
What is a dominant strategy?
a strategy that results in the highest payoff to a player regardless of the opponent’s action
What is a Nash equilibrium?
a set of strategies in which no player can improve her payoff by changing her own strategy given the other players’ strategies
What is the calculation for the present value of colluding in a infinitely repeated game?
PV = (yr1 payoff) + (yr1 payoff)/i
What is the present value of colluding in a finitely repeated game?
PV = [(1+i)/ (i+O)] * (yr1 payoff)
Where O is the probability of game ending.
What is a subgame perfect equilibrium?
a condition that describes a set of strategies that constitutes a Nash equilibrium and allows no player to improve his own payoff at any stage of the game
What are the rules of the game in a Bertrand oligopoly?
- The firms produce identical products at a constant marginal cost.
- Firms engage in price competition and react optimally to prices charged by competitors.
- Consumers have perfect information and here are no transaction costs.
What are the rules of the game for a Cournot oligopoly?
- The firms produce either differentiated or homogeneous products.
- Each firm believes rival will hold their output constant if it changes its own output.
What is a reaction function?
a function that defines the profit-maximizing level of output for a firm for a given output level of another firm.
What is a Cournot equilibrium?
a situation in which neither firm has an incentive to change its output given the other firms output
How do you calculate profit maximization?
MC = MR
What is an isoprofit curve?
A function that defines the combinations of outputs produced by all firms that yield the same level of profits.
What are the rules of the game for a Stackelberg oligopoly?
- The firms produce either differentiated or homogeneous products.
- A single firm chooses an output before all other firms choose their outputs.
- All other firms take as given the output of the leader and chooses output that maximize profits.
What are the features of a monopoly?
- single market firm
* barrier to entry
What are the features of monopolistic competition?
- differentiated products
* free entry and exit to market
What is the difference between a monopoly and monopolistic competition?
There are barriers to entry for a monopoly but not for monopolistic competition.
