Microeconomics

Question 1

What is the optimal access fee for a two-part tariff?

Answer 1

Area of CS = ((P-MC)*Q)/2

Question 2

What is the goal of a two-part tariff

Answer 2

Extracting all consumer surplus

Question 3

How much is consumed in units, when a two-part tariff is used?

Answer 3

After paying access fee, customers will consume up to where MC meets D.

Question 4

Name two characteristics of public goods

Answer 4

Non-rivalrous

Non-excludable

Question 5

What does “non-rivalrous” mean?

Answer 5

The marginal cost of providing the good for another consumer is 0

Question 6

What does “non-excludable” mean?

Answer 6

Individuals cannot be excluded from consuming the good, making it difficult to charge for the good

Question 7

How are marginal social costs calculated?

Answer 7

MSC = Marginal external cost + Marginal cost

Question 8

What is the function for price elasticity?

Answer 8

P/Q * deltaQ/deltaP

Question 9

Which factors can lead cartel formation

Answer 9

High barriers to entry
Price transparency
Few players
Homogenous products
Static industry / overcapacity

Question 10

Which are the four microeconomic assumptions?

Answer 10

People make choices given certain restrictions

People react to incentives

We are forward looking – we consider how our actions today will affect costs and benefits, given others’ actions (that can also change)

We equate allocations on the margin – we want the marginal cost of an action to be equal to its marginal benefit

Question 11

Which are the three conditions for third-degree price discrimination?

Answer 11

1. Demand must be heterogeneous
   Perhaps due to income, tastes, etc, different price elasticities…
2. Managers can identify and segregate the different segments
3. Markets must be successfully sealed
   = difficult to transfer product from one group to another

Question 12

How should MR be set for different groups in third-degree price discrimination?

Answer 12

The split between groups should be such that MR is the same in all groups.

Question 13

What characterizes monopolistic competition?

Answer 13

1 Many firms and free entry

2 Non-homogenous good

3 Differentiation

2 and 3 are different from in perfect competition!

Question 14

Name four characteristics of perfect competition

Answer 14

Products are standardized (identical)

No barriers to entry/exit

No non-price competition

Firms are price takers

Question 15

How do you find the firm’s supply curve in perfect competition?

Answer 15

It is the MC curve above the AVC curve

and the AVC curve looks like the ATC curve, but is generally lower

Question 16

Why do oligopolies exist?

Answer 16

High barriers of entry

Government fiat

Economies of scale

Question 17

What is another word for Bertrand competition?

Answer 17

Price competitions

Question 18

What is another word for Cornout competition?

Answer 18

Quantity competition

Question 19

What is the definition of a monopolist?

Answer 19

Someone who is the only seller of a product for which there are no close substitutes and which is protected by barriers to entry

Question 20

Give for examples of how monopolies can emerge

Answer 20

Geographic monopoly

Natural monopoly
Production has very high fixed costs
Scale must be very large to cover these

Legislated monopolies (e.g. patent legislation)

lllegal reasons

Question 21

Which are the two basic types of rules that form the cornerstones of competition law?

Answer 21

1. When there are no ways of getting a competitive environment, firms in a monopoly situation are generally forbidden to “abuse their market power”
2. In situations where a market can naturally be a competitive environment it is illegal to act so as to prevent this

Question 22

How is producer surplus defined?

Answer 22

A firm’s producer surplus is the sum of differences between the market price and the marginal cost for all units produced

Question 23

How is consumer surplus defined?

Answer 23

Individual consumer surplus: the difference between what a consumer is willing to pay and what she actually pays

Question 24

What is social welfare?

Answer 24

SW = producer surplus + consumer surplus

Question 25

Define dominant strategies

Answer 25

Strategies which are preferred no matter what the other player does

Question 26

Define dominated strategies

Answer 26

Strategies which are never a best response to anything that the other player may do

Question 27

Name three reasons for cooperation breakdown in the Prisoner’s Dilemma (repeated play)

Answer 27

Changes in demand
Changes in costs
Difficult to reach implicit agreement

Question 28

What are the four fields of the Prisoner’s Dilemma called?

Answer 28

Reward
Temptation
Punishment
Sucker’s payoff

Question 29

Define moral hazard

Answer 29

A situation in which a party insulated from risk behaves differently from how it would behave if it were fully exposed to the risk

Question 30

Define adverse selection

Answer 30

Market failure since because products that differ in quality sell for the same price because of asymmetric information, so that too much of the product of bad quality is sold and too little of the product of good quality

Question 31

Name four cartel strategies

Answer 31

• Price fixing (alt. quantity rationing)
• Market sharing (products/regions)
• Bidrigging
• Restrictive agreements (pay-for-delay)

Question 32

Name two types of dominance abuse

Answer 32

Exclusionary abuse

Exploitative abuse

Question 33

Describe Exclusionary abuse

Answer 33

Exclusionary abuse
• Refusal to deal
• Rebate arrangements
• Predatory pricing

Question 34

What is Exploitative abuse?

Answer 34

Exploitative abuse

= Excessive pricing

Question 35

How can dominance be achieved?

Answer 35

• The legacy of privatizing state monopolies
• Through innovation (creating a new market!)
• Patent protection!
• Resilience (in the case of declining industries)
• Through Mergers & Acquisitions (market concentration)

Question 36

What is the fundamental difference between horizontal and vertical control? (in relations to mergers and cartels)

Answer 36

Horizontal = you want other party to worsen their offering (raise prices)

Vertical = you want other party to improve their offering (lower prices)

Question 37

What is the lecture example of a unilateral effect (of a merger)?

Answer 37

Raising prices in firm A, diverting customers to firm B, the merging with firm B (= unfair advantage)

Question 38

Name the potential unilateral and coordinated effects of mergers

Answer 38

• Unilateral effects:
Elimination of independent substitute goods Reduced competitive pressure = price rise

• Coordinated effects:
Increased concentration
Increased risk of explicit/implicit ”cartel”

Question 39

Which are the two types of relevant markets?

Answer 39

Product market & geographic market

Question 40

What does the SSNIP-test stand for?

Answer 40

Small but Significant Non-transitory Increase in Price

Question 41

What is the algorithm of the SSNIP-test?

Answer 41

a. Start with narrowest possible relevant product market
b. If all actors in this product market were to be replaced by a Hypothetical Monopolist, would it be able to profitably increase prices by a small but significant amount (5-10%)?
c. If yes, you have established your relevant market, if no, broaden your market definition by including more products, and try again.
d. But which products should be added next? Good question, no good answer (hence the algorithm’s imperfection).

Question 42

Define a “relevant product market”

Answer 42

A relevant product market comprises all those products which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use