Final Review

Question 1

For public goods, you always want to add

Answer 1

vertically think pubv

Question 2

For private goods, you always want to add

Answer 2

horizontally

Question 3

WTP =

Answer 3

xG - xcertain

Question 4

Risk Premium =

Answer 4

WTP - Eclaim

Question 5

What is a moral hazard

Answer 5

Occurs if you cannot easily determine if A is in P’s best interest (i.e. driving recklessly on insurance) Mitigate with deductible (you pay first), co-insurance, etc.

Question 6

What is adverse selection

Answer 6

When you don’t know certain traits (i.e. used cars might be lemons if you’re not careful, health insurers don’t know if a patient gets sick a lot or not) can be solved with test, drive, warranty, or third party reporting orgs, transcripts, etc

Question 7

Draw a positive externality graph and label DWL

Answer 7

see paper

Question 8

Draw a negative externality graph and label DWL

Answer 8

see paper

Question 9

Draw a tax graph and label DWL

Answer 9

see paper

Question 10

Draw a subsidy graph and label DWL

Answer 10

see paper

Question 11

What’s the annuity shortcut

Answer 11

PV = X (1/r - 1/r(1+r)^t)

Question 12

Draw a LRAC chart

Answer 12

see paper

Question 13

What is a piguovian Tax formula

Answer 13

T = MEC[Qsoc]

Question 14

What happens to the monopolistic competition graph when advertisement is used

Answer 14

Increase FC and ATC but not AVC, demand becomes more elastic

Question 15

What happens in a monopolistic competitive graph when new competitors come in

Answer 15

Demand shifts left and slopes even further downward (more elastic)

Question 16

What do you set to find equilibrium for 3DPD

Answer 16

MC = ATC

Question 17

What do you set to find equilibrium for 1DPD

Answer 17

MC = WTP

Question 18

What do you do for first best price

Answer 18

P = MC

Question 19

What do you do for second best price

Answer 19

P = ATC

Question 20

Draw how to find CS, PS, and DWL in an unregulated monopoly

Answer 20

See paper

Question 21

What are traits of an oligopoly

Answer 21

few firms, price setting, sort of easy entry, primarily run by strategic behavior and game theory

Question 22

What are traits of a competitive monopoly

Answer 22

many firms, variety of goods and services, some price setting, easy entry, differentiate through ads and innovation

Question 23

What are traits of a natural monopoly

Answer 23

1 firm, price setting, no easy entry, constrained by demand

Question 24

When D is tangent to ATC

Answer 24

profit = 0

Question 25

What are some common entry barriers to a monopoly

Answer 25

Large fixed cost - CTA , control of key input - diamond example, unique geographical location - Panama Canal, intellectual property, positive network externalities - think FB, customer loyalty - frequent flyer miles

Question 26

We use MC to

Answer 26

choose output (MR = MC for equilibrium quantity)

Question 27

We use AVC to

Answer 27

figure out whether to shut down or not

Question 28

We use ATC

Answer 28

calculate profit profit = p*q* - q*ATC[Q*]

Question 29

We use LRAC to

Answer 29

justify exit or entry in long run (if P>= Min LRAC) -> enter/stay in, if P < min LRAC stay out

Question 30

What are structural entry barriers

Answer 30

customer loyalty, network effects, kept input or location, capital investment

Question 31

What are legal entry barriers

Answer 31

government mandated monopolies and intellectual property

Question 32

What are strategic entry barriers

Answer 32

deterrence by incumbents (learn by doing, product proliferation)

Question 33

What is an allocative inefficiency

Answer 33

In a monopoly Qmin < Qpc which results in DWL

Question 34

What is productive inefficiency

Answer 34

Q is never going to be at both min LRAC as well as min ATC

Question 35

What is technological inefficiency

Answer 35

Due to the rate of technology, the ATC curve might not lower as fast as we want it to

Question 36

What is X inefficiency or managerial inefficiency

Answer 36

management gets lazy and works on pet projects, raising ATC

Question 37

What is rent seeking

Answer 37

lobbying for monopoly presence erodes into profits

Question 38

What's bertrand price competition

Answer 38

Two duopolist, same product, sometimes different or same ATC and multiple consumers

Question 39

What's the difference between chapter 7 and chapter 11 bankruptcy

Answer 39

Chapter 7 -> firm is dead, Chapter 11 -> how to pay back and restore from to original state