Lecture 3

Question 1

what is the Marginal Rate of Transformation (MRT)

Answer 1

the rate at which one good must be sacrificed in order to produce a single extra unit of another good.

Question 2

what is a comparative advantage

Answer 2

the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.
(go over numerical example)

Question 3

Define a Cartel

Answer 3

Cartel - a group of firms that explicitly agree to coordinate their activities for their mutual benefit

Question 4

Define Oligopoly

Answer 4

Oligopoly - a small group of firms in a market with substantial barriers to entry.

Question 5

define a monopoly

Answer 5

when a single firm dominates the market structure

Question 6

what is the profit maximisation function

Answer 6

• profit(Q) = R(Q) – C(Q), where
• R(Q) is the revenue function
• C(Q) is the cost function

Question 7

what are the FOC and SOC for profit maximisation

Answer 7

first-order differentiation must equal 0

Second order must be less than 0

Question 8

define the Lerner index

Answer 8

describes a firm’s market power. It is defined by: where P is the market price set by the firm and MC is the firm’s marginal cost. The index ranges from a high of 1 to a low of 0, with higher numbers implying greater market power.
equation: p-MC/p

Question 9

things to remember for cartels 1

Answer 9

international cartels and cartels within certain countries operate legally
•In most countries cartels are illegal. However,
–The existence of a cartel may be hard to prove,
–some illegal cartels operate believing that they can avoid detection or that the punishment will be insignificant
–companies can also choose to collude tacitly, with the help of all sort of signalling and punishments.

Question 10

things to remember for Cartels 2

Answer 10

• Cartel members must each do better in the cartel equilibrium than in the competitive equilibrium–Otherwise, they would favour competition
• But each member of the cartel has an incentive to ‘cheat’, and sell a higher output than the agreed level–Because of p&raquo_space; MC
• Cartels may also fail in the presence of competition from non-cartel suppliers. This will depend on barriers to entry.

Question 11

what conditions may all cartels to succeed

Answer 11

• Where the product is relatively homogeneous. Price discrimination is easier with differentiated products
• Where market information is easier to come by
• Where there is a relatively small number of firms (coordination costs)
• Where there are few non-cartel competitors (high barriers to entry)