Theme 3 Flashcards
1
Q
What is game theory
A
A theory that firms would collude to set price and output to increase joint profit
2
Q
What is Kinked demand and the diagram
A
Demonstrates the rigidity of prices
3
Q
What is the evaluation of game theory?
A
- there is incentive to cheat the quota
- it depends on the conditions of the market if they’re suitable for collusion e.g homogenous goods, PED of good, high market share, similar business objectives
- The model is too simple as oligopolies are usually more than two firms whereas the model only shows two
4
Q
Evaluate the kinked diagram
A
- in reality price wars do happen
- firms may collude
- non price factors like quality or location can change the price
- cost can be absorbed by firms until it exceeds the vertical section.
5
Q
On a cost and revenue diagram how do you show an increase in fixed cost
A
Shift AC upwards
6
Q
How do you a show an increase in variable cost
A
Shift mc and ac
7
Q
Why may profitability not decrease despite an increase in prices
A
- cost of raw materials is volatile
- raw materials are a small % of total cost
- profit is determined by revenue
- high cost may eliminate competition and increase the firms market share
- collusion may occur in the market structure
8
Q
Why is the coffee industry a contestable market?
A
- rent is low, raw materials are cheap and skills needed is minimal
- capital can be rented instead of bought
9
Q
What is the problem of subsidies when preventing a shut down
A
- opportunity cost
- information gaps on how much and how the firms will use
- moral hazard may occur
- firms may become dependent (zombie firms)
- Policy myopia, may be effective in short and not long term
- Does not solve underlying problem e.g DEOS and lack of synergy
10
Q
why may x-inefficiency occur in a firm
A
- organisational slack
- rising cost of labour
11
Q
how do you show a rise in variable cost in cost and revenue diagram
A
increase in mc and ac
12
Q
A
