Week 10 - Imperfect competition, labour demand, risk and asymmetric information

Question 1

What are the characteristics of a Monopolistically competitive market (x6)

Answer 1

1. A large number of buyers and sellers
2. Low barriers to entry/exit
3. Slightly differentiated goods/services
4. Imperfect information
5. Price makers
6. Only normal profits in the long run

Question 2

What are the characteristics of an Oligopolistically competitive market (x7)

Answer 2

1. A small number of sellers
2. High barrier to entry/exit
3. Non-price competition (differentiated/homogenous goods/services)
4. Price makers
5. Interdependence
6. Perfect information
7. Supernormal profits in the long run

Question 3

What is Collusion

Answer 3

When two or more firms in the same industry collaborate to gain an extensive competitive advantage to limit open market competition

Question 4

What is Overt/Explicit collusion

Answer 4

A type of collusion in which firms formally agree to control the market, and directly communicate to coordinate their actions

Question 5

What is Tacit/Implicit collusion

Answer 5

A type of collusion in which firms informally agree to control the market, and indirectly coordinate their actions (following a price leader)

Question 6

What formula determines the iso-cost curve, and it’s slope

Answer 6

C = wL + rK
dL/dK = - r/w

Question 7

What is the formula for the Profit maximising amount of labour

Answer 7

P x MPL = w
MPL = w/P

Question 8

What are the 2 margins of labour supply

Answer 8

The intensive margin reflects changes in the hours that employed workers work
The extensive margin reflects changes in the number of individuals that are employed

Question 9

What are characteristics of a Monopsony market (x5)

Answer 9

1. Single buyer a large number of sellers
2. High barriers to entry/exit
3. Imperfect information
4. Homogenous goods/services
5. Supernormal profits

Question 10

What is the relationship between Diminishing marginal utility and Risk

Answer 10

Diminishing marginal utility implies that individuals are risk averse (dislikes risk, will never take a fair gamble)

Question 11

What does Risk neutrality imply about Utility

Answer 11

That utility is a straight line, MU is the same at every point

Question 12

How does Insurance work

Answer 12

By pooling independent risks to reduce overall risk exposure

Question 13

What is Asymmetric information

Answer 13

When one agent (informed) in an economic transaction has more information than the other agent (uninformed)

Question 14

What is Adverse selection

Answer 14

A type of asymmetric information, where only the informed agent knows relevant information about unobservable characteristics to the uninformed agent

Question 15

What is Moral hazard

Answer 15

A type of asymmetric information, where the informed agent takes more risks because the uninformed agent is bearing the costs of those risks

Question 16

What provides a partial solution to Adverse selection

Answer 16

SIgnalling, the signal must be credible and correlated with desired unobservable attributes

Question 17

What is the Principal-agent problem

Answer 17

When the interests of the principals are not aligned with the interests of the agents, who make decisions on their behalf