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Economics 101 > Final Exam > Flashcards

Final Exam Flashcards

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1
Q

What are price takers?

A

Individual firms that have no impact on market price

Perfect competition

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2
Q

What does the demand curve of price takers look like?

A

Face horizontal, perfectly elastic

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3
Q

What are price searchers?

A

Firms that have at least some influence on market price

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4
Q

What does the demand curve of price searchers look like?

A

Face downward sloping demand curve

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5
Q

What is market power?

A

The ability of a firm to raise its price above the competitive level

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6
Q

What is a monopoly?

A

A market with a single supplier of a good

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7
Q

What are the constraints of a monopoly?

A

Constrained by the demand curve

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8
Q

What is the profit maximizing condition?

A

Firm will continue to produce as long as the additional revenue from an additional unit of output is greater than the additional cost from an additional unit of output

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9
Q

When will a profit maximizing condition stop producing?

A

When marginal revenue = marginal cost (or last unit for which marginal revenue > marginal cost)

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10
Q

How does a monopolist attract new customers?

A

Lower price

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11
Q

What is a price effect?

A

After a price increase, each unit sold sells at a higher price, which tends to raise revenue

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12
Q

What is a quantity effect?

A

After a price increase, fewer units are sold, which tends to lower revenue

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13
Q

What is true of marginal revenue for a monopolist?

A

At any given quantity, marginal revenue will be less than price (due to price effect)

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14
Q

What is the marginal revenue received from selling an additional unit is equal to?

A

The price received for the additional unit (quantity effect)

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15
Q

What is the marginal revenue lost from selling an additional unit equal to?

A

Lost revenue from lowering the price to existing customers willing to pay more (price effect)

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16
Q

If the total revenue curve is increasing at a decreasing rate

A

Quantity effect dominates price effect

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17
Q

If the total revenue curve is decreasing at an increasing rate

A

Price effect dominates quantity effect

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18
Q

Explain the shape of the total revenue curve at low levels of output

A

Quantity effect is stronger than the price effect

As the monopolist sells more, it has to lower the price on only very few units, so the price effect is small

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19
Q

Explain the shape of the total revenue curve at high levels of output

A

Price effect is stronger than the quantity effect

As the monopolist sells more, it now has to lower the price on many units of output, making the price effect very large

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20
Q

What is elasticity?

A

Measure of responsiveness of one variable to changes in another variable

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21
Q

If demand for a good is elastic

A

Quantity effect will dominate the price effect

Decrease in price will increase total revenue

Increase in price will decrease total revenue

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22
Q

If total revenue is increasing, what must be true of marginal revenue?

A

It is positive

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23
Q

If demand for a good is inelastic

A

The price effect will dominate the quantity effect

A decrease in price will decrease total revenue

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24
Q

If total revenue is decreasing, what must be true of marginal revenue?

A

It is negative

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25
Q

What does the total revenue curve look like in the elastic region?

A

It is increasing at a decreasing rate

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26
Q

What does the total revenue curve look like in the inelastic region?

A

It is decreasing at an increasing rate

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27
Q

If demand for a good is unit elastic

A

The price and quantity effects will offset

Marginal revenue will be zero

Marginal revenue curve crosses the horizontal axis at this point

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28
Q

How will a monopoly maximize profit?

A

The monopolist will continue to produce more units of a good until the additional revenue from the last unit produced equals the additional cost

MR = MC

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29
Q

Difference between where perfectly competitive firms and monopolies produce

A

Perfectly Competitive Firms:
P = MC

Monopolies:
P > MR = MC

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30
Q

Compared with a competitive industry, a monopolist will produce (quantity)

A

Monopolies will produce a smaller quantity than a competitive industry

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31
Q

Compared with a competitive industry, a monopolist will produce (price)

A

Monopolies will charge a higher price than competitive industries

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32
Q

Monopolists Profit Equation

A

Profit = TR - TC

= (P x Q) - (ATC x Q)

=(P - ATC) x Q

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33
Q

When will a monopoly shutdown in the short run

A

Price < Average Variable Cost

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34
Q

When will a monopoly shutdown in the long run

A

Price < Average Total Cost

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35
Q

What is the welfare effect of a monopoly?

A

Monopolist charges a price higher than marginal cost and produces output at a level lower than the efficient, perfectly competitive output level

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36
Q

What is the effect of welfare effects on society

A

Monopolies cause deadweight loss to society

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37
Q

Is consumer surplus higher in a monopoly or in perfect competition?

A

Perfect competition

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38
Q

Why do monopolies exist?

A

Monopolists have market power

In order for profits to persist in the long-run, some form of barrier to entry must be in place

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39
Q

What does it mean that a monopolist has market power

A

Charges a higher price than perfectly competitive outcome

Produces a lower quantity than the perfectly competitive outcome

Creates deadweight loss

Generates economic profits for the firm

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40
Q

What are 3 barriers of entry?

A
  1. Control of scarce resource or input
  2. Cost advantages
  3. Government created monopoly
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41
Q

What are cost advantage barriers?

A

Large set-up costs initially

Natural monopoly (local utilities: water, gas, electricity)

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42
Q

What are government created monopolies?

A

Government license (government grants firm exclusive right to serve given area)

Patents and copyrights
(Patents: 20 years from date of filing
Copyrights: 70 years post death)

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43
Q

Regulation of monopolies?

A
  1. Break-up monopoly
  2. Price regulation
  3. Increase competition
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44
Q

How do you break-up monopoly?

A

Anti-trust legislation

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45
Q

What is the point of price regulation in a monopoly?

A

Set a price ceiling. If set at proper amount can get rid of welfare losses

46
Q

How can competition by increased in a monopoly?

A
  • Grant more licenses
  • Reduce trade barriers for foreign firms
  • Alter patent laws
  • Subsidize competing firms (offer tax breaks)
47
Q

How does a price ceiling affect a monopoly?

A

If the monopolist must now charge a price equal to average total cost. This leads to expansion of consumer surplus, and zero profit for the monopoly

48
Q

What is price discrimination?

A

Charging different prices to different consumers for the same good

49
Q

Why do firms attempt to price discriminate?

A

To earn a profit

50
Q

Why is price discrimination a thing?

A

There are differences in consumer willingness to pay for a good

51
Q

When is price discrimination profitable?

A

Consumers differ in their sensitivity to the price

52
Q

What is the key element to price discrimination?

A

It is profit-maximizing to charge a higher price to consumers who are relatively more price inelastic and charge a lower price to consumers who are more price sensitive (elastic)

53
Q

What is the risk in price discrimination to price sensitive consumers?

A

Charging them a higher price may drive them out of the market

54
Q

What are 3 conditions necessary for price discrimination?

A
  1. Firms must have market power
  2. Firm must be able to identify differences in willingness to pay between consumers
  3. Firm must be able to limit resale of product
55
Q

Do perfectly competitive firms have market power?

A

NO

56
Q

What are 4 types of price discrimination?

A
  1. Perfect Price Discrimination
  2. Quantity Discrimination
  3. Multi-Market Price Discrimination
  4. Two-Part Tariff
57
Q

What is perfect price discrimination?

A

Charge the maximum amount each consumer is willing to pay

Price = Marginal Value

58
Q

What is quantity discrimination?

A

Firm charges a different price for large quantities than for small quantities

All customers who buy a given quantity pay the same price

59
Q

What is multi-market price discrimination?

A

Charge different groups of customers different prices depending on their willingness to pay for the group

60
Q

What is a two-part tariff?

A

Charge customers a lump-sum fee for the right to buy the good at specified price

Pt 1. Lump Sum Fee
Pt 2. Per-Unit Price

61
Q

Marginal Revenue Curve for Perfect Price Discrimination?

A

Marginal Revenue Curve becomes the Demand Curve

62
Q

What are the results of a perfectly price discrimination monopoly?

A

Net benefits to society are maximized

No deadweight loss

63
Q

Benefits to producer in a perfectly price discrimination monopoly?

A

All benefits go to producer in this case

64
Q

Benefits to consumer in a perfectly price discrimination monopoly?

A

Consumer surplus is zero

65
Q

How do producers take advantage of the demand curve using quantity discrimination?

A

Consumers are willing to pay a lower price for successive units

66
Q

What is the most common type of price discrimination?

A

Multi Market Price Discrimination

67
Q

How do producers identify which group an individual belongs to?

A

Observable Characteristics

Get consumers to self-select themselves into different groups

68
Q

What is imperfect competition?

A

Competition among firms who have some market power

69
Q

What is an oligopoly?

A

Industry with a small number of producers

Barriers to entry exist, just not as strong as with monopoly

70
Q

What is a duopoly?

A

Oligopoly with two firms

71
Q

What are the two types of imperfect competition?

A
  1. Non-Cooperative

2. Cooperative

72
Q

What is non-cooperative imperfect competition?

A

Each firm makes decision about output and price without consulting each other

73
Q

What is cooperative imperfect competition?

A

Decisions made jointly

Price or quantity setting (typically illegal)

Collusion

74
Q

What is collusion?

A

Two or more firms acting together to set prices or quantity rather than competing?

75
Q

What is a cartel?

A

Firms acting together as if a monopoly

76
Q

What is game theory?

A

How economists model strategic behavior

77
Q

What is Nash equilibrium?

A

Occurs when, holding the strategies of all other players constant, no single player can obtain a higher payoff by choosing a different strategy

Given what the other players are currently doing, no player can given by altering their own strategy

78
Q

What is the dominant strategy?

A

Strategy that gives the player a higher payoff no matter what strategy the opponent is playing

79
Q

What is tit for tat strategy?

A

Tit for tat involves playing cooperatively at first, then doing whatever the other player did in the previous period

80
Q

Is the dominant strategy always the best possible outcome for the player?

A

No, sometimes the dominant strategy is not the best possible outcome for all players collectively (see prisoners dilemma)

81
Q

What do the payoffs in game theory consist of?

A

Both costs and benefits (positives and negatives)

82
Q

Do all games in game theory have a dominant strategy?

A

No

83
Q

Is Nash equilibrium the same as the dominant strategy?

A

No, Nash equilibrium is an outcome, while dominant strategy is a strategy

84
Q

Profit maximizing condition for a monopoly?

A

MR = MC

85
Q

Profit maximizing condition for an oligopoly?

A

MR = MC

86
Q

Profit maximizing condition for perfect competition

A

P = MR = MC

87
Q

Does a monopoly have the ability to set price?

A

Yes, they are price searchers

88
Q

Does an oligopoly have the ability to set price?

A

Yes, they are price searchers

89
Q

Can firms price set when in perfect competition?

A

No, they are price takers

90
Q

What kind of market power does a monopoly have?

A

Price > Marginal Cost

91
Q

What kind of market power does an oligopoly have?

A

Price > Marginal Cost

92
Q

What kind of market power is there in perfect competition?

A

Price = Marginal Cost

93
Q

Entry into a monopoly?

A

No entry

94
Q

Entry into an oligopoly?

A

Limited entry

95
Q

Entry into perfect competition?

A

Free entry

96
Q

Number of firms in a monopoly?

A

1

97
Q

Number of firms in an oligopoly?

A

Few

98
Q

Number of firms in perfect competition?

A

Many

99
Q

Long-Run profits for a monopoly

A

≥ 0

100
Q

Long-Run profits for an oligopoly?

A

≥ 0

101
Q

Long-Run profits in perfect competition?

A

0

102
Q

Is strategy dependent on rival firms in a monopoly?

A

No

103
Q

Is strategy dependent on rival firms in an oligopoly?

A

Yes

104
Q

Is strategy dependent on rival firms in perfect competition?

A

No

105
Q

What is true of a non-cooperative oligopolies?

A

They compete with other firms

106
Q

What is true of cooperative oligopolies?

A

They will collude with other firms

Will collectively want to act like a monopoly

107
Q

Why does a colluding duopolist have an incentive to change production levels when a monopolist does not?

A

Differences in size of price effect

108
Q

What are 4 conditions for cooperations in a duopoly?

A
  1. Repeated interactions over time
  2. Easy to monitor other firms
  3. Entry by non-colluding firms difficult
  4. Merge
109
Q

Why does being easy to monitor other firms incite cooperation?

A

Good information concerning prices and output levels

110
Q

How much will non-colluding oligopolists collectively produce?

A

More than a monopoly but less than a perfectly competitive industry

111
Q

What has less deadweight loss, a noncooperative oligopoly or a monopoly?

A

Noncooperative oligopoly

Economics 101 (3 decks)

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