Final Review Flashcards
For public goods, you always want to add
vertically think pubv
For private goods, you always want to add
horizontally
WTP =
xG - xcertain
Risk Premium =
WTP - Eclaim
What is a moral hazard
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.
What is adverse selection
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
Draw a positive externality graph and label DWL
see paper
Draw a negative externality graph and label DWL
see paper
Draw a tax graph and label DWL
see paper
Draw a subsidy graph and label DWL
see paper
What’s the annuity shortcut
PV = X (1/r - 1/r(1+r)^t)
Draw a LRAC chart
see paper
What is a piguovian Tax formula
T = MEC[Qsoc]
What happens to the monopolistic competition graph when advertisement is used
Increase FC and ATC but not AVC, demand becomes more elastic
What happens in a monopolistic competitive graph when new competitors come in
Demand shifts left and slopes even further downward (more elastic)
What do you set to find equilibrium for 3DPD
MC = ATC
What do you set to find equilibrium for 1DPD
MC = WTP
What do you do for first best price
P = MC
What do you do for second best price
P = ATC
Draw how to find CS, PS, and DWL in an unregulated monopoly
See paper
What are traits of an oligopoly
few firms, price setting, sort of easy entry, primarily run by strategic behavior and game theory
What are traits of a competitive monopoly
many firms, variety of goods and services, some price setting, easy entry, differentiate through ads and innovation
What are traits of a natural monopoly
1 firm, price setting, no easy entry, constrained by demand
When D is tangent to ATC
profit = 0
What are some common entry barriers to a monopoly
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
We use MC to
choose output (MR = MC for equilibrium quantity)
We use AVC to
figure out whether to shut down or not
We use ATC
calculate profit profit = pq - qATC[Q]
We use LRAC to
justify exit or entry in long run (if P>= Min LRAC) -> enter/stay in, if P < min LRAC stay out
What are structural entry barriers
customer loyalty, network effects, kept input or location, capital investment
What are legal entry barriers
government mandated monopolies and intellectual property
What are strategic entry barriers
deterrence by incumbents (learn by doing, product proliferation)
What is an allocative inefficiency
In a monopoly Qmin < Qpc which results in DWL
What is productive inefficiency
Q is never going to be at both min LRAC as well as min ATC
What is technological inefficiency
Due to the rate of technology, the ATC curve might not lower as fast as we want it to
What is X inefficiency or managerial inefficiency
management gets lazy and works on pet projects, raising ATC
What is rent seeking
lobbying for monopoly presence erodes into profits
What’s bertrand price competition
Two duopolist, same product, sometimes different or same ATC and multiple consumers
What’s the difference between chapter 7 and chapter 11 bankruptcy
Chapter 7 -> firm is dead, Chapter 11 -> how to pay back and restore from to original state
