MT 1 Flashcards
What is 1st Degree Price Discrimination
Perfect price discrimination- a pricing strategy in which a firm charges each customer exactly their willingness to pay. The producer knows each individuals WTP.
What is the optimal condition of 1st degree price discrimination
MR=WTP capturing all consumer surplus
What is 3rd Degree Price Discrimination
segmenting- firm charges different prices to different groups of customers based on identifiable attributes of those groups
What is the optimal condition of 3rd degree price discrimination
MR1=MC on D and MR2=MC on D, just like monopoly be for each separate market
What is 2nd Degree Price Discrimination
indirect price discrimination - a pricing strategy in which customers pick among a variety of pricing choices offered by the firm as they can’t identify which customers have which type of demand
What is the optimal condition of 2nd degree price discrimination
MR=MC were prices are incentive compatible, the discount high quantity consumers get, creates loss for low consumers
What is Mixed Bundling
firm sells two or more products at a single price and separately
What are the 5 steps to a bundling question
- Calculate total economic surplus (MC-WTP)
- Find the outliers that should be charged different prices
- Set the price of the bundle to the lowest WTP for the bundle
- Calculate CS for the bundles
- Set the individual prices for the outlies so the CS is equal to the bundle
What is a 2 part tariff
Pricing strategy in which the payment has two components, a per unit price and a fixed fee (ex, costco and golf memberships)
What are the two parts to the 2 part tariff and what is the optimal condition
Fixed fee = CS and user fee P=MC
What is MRPL
Marginal Revenue Product of Labour, it is equal to the MP of Labour times MR
In a labour demand curve what are the axis labeled and the optimal condition
X=Quantity of Labour
Y= Wage
Optimal condition MRPL=W
The downward sloping cure is the MRPL curve
What is the other interpretation of the optimal condition in a labour market
MR=W/MPL
Explain the Backward being Labour supply Curve
as wages increase, people initially work more hours, but at very high wages, they may work fewer hours, choosing more leisure time instead
At low wages, the substitution effect dominates → upward sloping
At high wages, the income effect dominates → curves backward
What are factors that increase the demand for labour (MRPL)
-Increase in D of the good using labour
-Increase in productivity
-Increase in K (capital)
What is the labour leisure equation
Wage x Time = Price of consumption x Consumption + Wages x Leisure
What is the optimal condition of a labour leisure problem (Cobb Douglass)
MUL/MUC=Wages/Price of consumption
What is a monopsony
Where there is only one buyer in the market
What are the 3 curves in a monopsony graph
Labour supply -upward sloping
Labour Demand (MRPL) - downward
Marginal Expenditure - upward sloping, derived from Labour supply, to hire additional workers, the employer must raise wages for all workers
Optimal condition of Monopsony
Q Where ME=MRPL or DL
W on the supply of Labour curve
What are the two points a union will operate at and what they represent
- MR=MC on the demand curve (monopoly) as it is profit maximizing
- MR=0 on the demand curve a it is -Wage maximizing to the most amount of union members
What is the optimal point in a market with a negative externality and with a positive externality
Where D=SMC (-)
Where S=SD (+)
What is the equation for Societal Surplus
SS=CS+PS+/-ES
What are the four types of goods
Private
Public
Common resource
Club
What is a private good
A good that is excludable and and rival in nature (ex. food and gas)
What is a common resource
A good that is nonexcludable but rival (ex.fishing)
What is a club good
A good that is excludable but nonrival (ex. Satellite tv, national parks)
What is a public good
A good that is nonexcludable and nonrival (ex. fireworks, national defense)
What is meant by the tragedy of the commons
the dilemma that common resources create when everyone has free access and the resource is used more intensively than it would be if privately owned, leading to a decline in value to everyone (ex, over fishing)
What are the five steps to a negative externalities question
- Identify the negative externality (MB=MC)
- Define market equilibrium without tax
- Determine socially optimal outcome
- Calculate the optimal tax (P*-Pmkt)
- Analyze impact of tax (PxQ for tax)
What are the five steps to a positive externalities question
1.Identify the Positive Externality
2.Define the Market Equilibrium without subsidy (MB=MC)
3.Determine socially optimal outcome (MSB=MC)
4. Calculate optimal subsidy (MSB-MB)
5. Analyze impact (PxQ for Subsidy to determine cost)
When externalities are present when should you use Q based mechanisms
When MC is inelastic, as the cost of missing is less impactful than P based mechanisms
When externalities are present and when should you use P based mechanisms
When MB is inelastic, as the cost of missing is less impactful than Q based mechanisms
