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ECON 2106 > Week 4 > Flashcards

Week 4 Flashcards

1
Q

What is Oligopoly?

A

A market with a small number of sellers, where the sellers interact strategically with each other.

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2
Q

Players in an Oligopoly:

A

The choices of all the players affect the outcome for each individual player.

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3
Q

Oligopoly in Economics:

A

There is no agreed upon single model. There are several different models, each of which have their own strengths and weaknesses.

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4
Q

Oligopoly in Economics 2:

A

One thing they do agree on is that any description of strategic behavior among a small number of firms is probably best described using game theory.

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5
Q

What is game theory?

A

It is a strategic behavior. A subcategory of game theory is Prisoner’s Dilemma.

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6
Q

What is Prisoner’s Dilemma?

A

Confess or not confess? (Bonnie & Clyde)

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7
Q

What is Strategy?

A

Choices available to each player.

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8
Q

What is a matrix graph?

A

An array of numbers; dimensions represent the number of players.

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9
Q

What is the solution to the game?

A

The outcome when each player is doing the best they can given what all other players are doing.

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10
Q

What is another name for the solution to the game?

A

Nash Equilibrium.

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11
Q

What is Dominant Strategy?

A

A choice for a player that maximizes her satisfaction no matter what her rivals are doing.

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12
Q

Nash Equilibrium:

A

The box in the matrix graph that contains two circles is the Nash Equilibrium.

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13
Q

What is a Self-Enforcing Agreement?

A

When they are each giving their best decision, neither can improve their situation by changing their minds.

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14
Q

Equilibrium:

A

Does not mean that it is necessarily a good outcome.

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15
Q

To keep Cooperation:

A

Third party enforcement, repeat play.

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16
Q

Best Outcome May:

A

1) Not be individually rational
2) Require repeat play
3) Depend on reputations
4) Require third party contracts

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17
Q

What do oligopolies and perfectly competitive firms have in common?

A

The rule of profit maximization

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18
Q

An oligopoly assumes:

A

Each firm will react to its competitor’s price decreases.

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19
Q

What is a Cartel?

A

An oligopoly where the individual members try to act as monopolists.

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20
Q

A Cartel Agreement:

A

Always maximizes profits for members of the oligopoly.

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21
Q

What would hinder the success of a cartel?

A

Low barriers to entry.

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22
Q

Cartels are:

A

Illegal in the U.S. for restraining free trade.

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23
Q

What are Externalities?

A

1) How they cause market failure

2) How to correct that market failure

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24
Q

What is External Cost?

A

The cost of a transaction that is borne by someone who is not a party to that transaction.

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25
Q

Examples of Private Costs (PC):

A

Materials, Labor, Equipment

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26
Q

Example of External Costs (EC):

A

Pollution

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27
Q

What is the True Social Cost?

A

TSC = PC + EC

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28
Q

How do we calculate External Cost?

A 
Consider the cost of correcting the problem.
1) Prevention
2) Clean-up
3) Pay to cover consequences
Which ever cost is least expensive
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29
Q

The Principle of the Second Best:

A

The best method to be used in a market failure is the one that most precisely corrects for the original problem.

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30
Q

If the production of a good results in negative externalities, then:

A

Production will be greater than the socially optimal output.

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31
Q

Negative externalities lead to:

A

Inefficiency.

32
Q

How do you determine your sale price if you are a firm with market power?

A

Do you want to charge high prices or low prices?

33
Q

If you charge a high price:

A

Customers will be hungry and avoid your product.

34
Q

If you charge a low price:

A

You’ll bring more customers in, but won’t make as high a margin on the product.

35
Q

What is Marginal Revenue?

A

The change in total revenue that results from a change in quantity sold.

36
Q

How can you have less revenue when you are selling more?

A

Because in order to sell those extra units, you have to lower the price, and the lower price hurts you by subtracting money that you could earn on units that you were already going to sell anyway.

37
Q

Marginal Revenue Curve:

A

Shows the amount of money earned by selling an extra unit of product.

38
Q

Average Revenue:

A

Total Revenue
——————— = Price
Quantity

39
Q

Where does the Marginal Revenue Curve lie?

A

It ALWAYS lies below the Demand Curve.

40
Q

Why is Marginal Revenue always lower than price?

A

Because in order to sell that last unit, the firm has to lower its price.

41
Q

True or False? Marginal revenue is always less than price for a competitive firm.

A

False.

42
Q

What is an Externality?

A

It is a cost or benefit that can be passed on to others.

43
Q

What is an External Cost?

A

The cost of a transaction that is borne by someone who is not a party to that transaction. (ex: cigarettes, home decor)

44
Q

What are External Benefits?

A

The benefit of a transaction that is received by someone who is not a party to that transaction. (ex: getting a flu shot)

45
Q

Negative externalities (external costs) that arise from the production of a good:

A

Impose unfair costs on parties outside the production.

46
Q

True or False? When externalities are present, the market will not maximize economic value.

A

True.

47
Q

How does a Monopoly maximize profits?

A

By choosing the point where Marginal Revenue = Marginal Cost.

48
Q

Average Total Cost Curve:

A

Includes the variable cost and the fixed cost of production.

49
Q

Where does Marginal Cost cut through the Average Total Cost?

A

At the point of Minimum Average Total Cost.

50
Q

Is the Monopolist making a positive economic profit?

A

(Profit per unit) Total Price
or profit margin —————– = P - ATC
Quantity

51
Q

Total Price =

A

Total Revenue - Total Cost

52
Q

Total Revenue =

A

Price x Quantity

53
Q

Total Cost =

A

Average Total Cost x Quantity

54
Q

If Average Total Cost is greater than Price

A

Monopoly is making a loss.

55
Q

If Average Total Cost is less than Price

A

Monopoly is making a profit.

56
Q

True or False? A monopolist calculates its profit by multiplying the quantity of output by the difference between average cost and average revenue.

A

True.

57
Q

True or False? A monopolist will always be able to operate at a profit.

A

False. A monopoly will maximize profit (or minimize loss) by producing at that level of output where marginal revenue (MR) equals marginal cost (MC) and charging the price as determined by the products demand curve. The monopoly will be profitable only if its average total cost (ATC) is less than the price that quantity of product can command.

58
Q

What is a correct statement about the marginal cost (MC) curve and average total cost (ATC) curve?

A

For a monopolist, the average total cost (ATC) curve is decreasing when it is above the marginal cost (MC) curve and is increasing when it is below the marginal cost (MC) curve.

59
Q

Where is the supply curve for a monopoly?

A

There is NO supply curve for a monopoly.

60
Q

What is a monopoly?

A

It is a price-setter.

61
Q

What do Competitive Markets do to Economic Value?

A

They maximized Economic Value.

62
Q

When is Economic Value created?

A

It is created when a product is created and traded where Benefit is greater than Cost.

63
Q

As a Monopoly, does the point where MC and Demand cross maximize your profits?

A

No, it does not.

64
Q

Where does a Monopoly maximize profits?

A

Where Marginal Cost and Marginal Revenue cross.

65
Q

Economic Value =

A

Benefit - Cost

66
Q

When is Economic Value lost?

A

When trade is restricted.

67
Q

Why are Monopolies bad?

A

1) Monopolies restrict trade. (increasing price)

2) Creates Deadweight Loss.

68
Q

How does a Monopoly choose a price and quantity for the good it sells?

A
  • In a Competitive market, a good that is freely available will sell for $0.
  • In a Monopoly, price will equal what the market will bear.
69
Q

What is Marginal Revenue?

A

The change in total revenue that results from a change in quantity sold.

70
Q

What is the Marginal Revenue Curve?

A

Tells you how much revenue you add to your total by selling an extra unit of output.

71
Q

Where does the Marginal Revenue Curve lie?

A

It ALWAYS lies BELOW the Demand Curve except for the first unit sold.

72
Q

Where is Total Revenue maximized?

A

Where MR intersects the horizontal axis.

73
Q

When we’re at the point of maximizing profits:

A

Marginal Revenue - Marginal Cost = 0
Or
MR = MC

74
Q

If Marginal Revenue is less than Marginal Cost:

A

Products are unprofitable.

75
Q

What is the rule for maximizing profit for a Monopoly?

A

To find the point where MR intersects with MC.

ECON 2106 (5 decks)

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