ECON 101: Principles of Microeconomics (Fall 2013) Review ..., Lecture notes of Microeconomics

Download ECON 101: Principles of Microeconomics (Fall 2013) Review ... and more Lecture notes Microeconomics in PDF only on Docsity! ECON 101: Principles of Microeconomics (Fall 2013) Review Sheet (also known as “The Giant Flash Card”) for Topics Covered after Midterm 2 1 The following topics have been covered in lectures and discussion sections after Midterm 2 and will be asked in Final Exam. The final exam is cumulative, so all the material from the beginning is covered! If you can’t remember what we have done so far, a good starting point is the review sheet I made for Midterm 1 and Midterm 2. (They are still on my website!) You are expected to know all these topics and be able to solve the problems with accuracy and speed. There will be 40 questions in 120 minutes, so you should average out 3 minutes per question. Even if some questions might take you less than 30 seconds, others might take as long as 5 minutes, spare your time accordingly. Rule of thumb: if the additional (marginal) benefit is greater than additional (marginal) cost, do it! Otherwise, don’t! (In fact, this is the main idea of every economic concepts!) You are maximizing the probability of getting the questions right, subject to the time constraint – if the additional time cost needed to get them right is higher the additional benefit, then you should do other questions! Topics studied so far are inter-related, you should expect something to cross-over with each other, e.g. production and cost will show up in perfect competition or monopoly problem, natural monopoly may be combined with price discrimination and topics in efficiency, etc. Market Structures Comparison Perfect Monopolistic Oligopoly MonopolyCompetition Competition Number of Firms Many Many or Few Few (2, 3 or more) One Product Homogeneous Slightly Different Different or Same Unique Demand Curve Facing Perfectly Elastic ?? ?? Market Profit Max. Rule P = MR = MC ?? Game Theory MR = MC Pricing Power of Firm Price Taker ?? Price Setter Barrier to Entry None Slightly (??) Maybe Yes (What?) Production Technology Same Same or Different Same or Different Exclusive Example ... ... ... ... Natural Monopoly • Again, answer the same questions as the usual monopolist for the natural monopolist. What is natural monopoly? Why there is such characteristic? Why do there exist such monopolist? Why going bigger in scale is better and not going smaller? Is it beneficial to have smaller firms in this kind of industry? How do the cost curves look like? What is the profit maximization solution and so on in the unregulated world? What is the profit maximizing rule for a natural monopolist? What does it mean? At such quantity, what is the cost to monopolist? What is the price charged to consumers? What is the total revenue? What is the profit? • What is social optimum for natural monopoly? What is the quantity and price? How to achieve such social optimum outcome? (MC Regulated) Is it sustainable? If not, how to make it possible? What is the amount of subsidy required? Answer the same questions. • Alternatively, what is the sustainable regulation? What is the quantity and price? What is AC regulation? Is it sustainable? Answer the same questions. 1 Prepared by Kanit Kuevibulvanich. (https://mywebspace.wisc.edu/kuevibulvani/web) This version: December 5, 2013. Disclaimer: Although summarized from textbook, homework and lectures, this note does not constitute as the official guidelines for the course, comments welcomed. 1 Price Discrimination • What is price discrimination? What are the requirements (initial conditions/rules) for a firm (in what market?) to price discriminate? How does the monopolist discriminate prices? • First-degree price discrimination: How does a monopolist charge each consumer? How many demand curves are there? What is the rule of charging prices and how many prices are there? At what price and sell at what quantity? What are the consumer surplus, producer surplus and deadweight loss? Do we have allocative efficiency? • Second-degree price discrimination: What gives rise to the rationale of doing second-degree instead of first-degree? How does a monopolist charge each consumer? How many demand curves are there? What price must the monopolists never drop below? What is the rule of charging prices and how many prices are there? At what price and sell at what quantity? What are the consumer surplus, producer surplus and deadweight loss? Do we have allocative efficiency? Why does deadweight loss look like so? • Third-degree price discrimination: What gives rise to the rationale of doing third-degree instead of first-degree? – If a monopolist cannot distinguish between groups of consumers (How many groups?), how would the monopolist charge the consumers and sell at what quantity? How many prices are there? How to find the market demand curve (recall before Midterm 1) and the market marginal revenue? Should the monopolist ignore any type at all and what is the criteria? – If a monopolist can distinguish between groups of consumers, how does a monopolist charge each consumer? How many demand curves are there? Why elasticities have anything to do with? What price must the monopolists never drop below? What is the rule of charging prices and how many prices are there? At what price and sell at what quantity? What are the consumer surplus, producer surplus and deadweight loss? Do we have allocative efficiency? Why does deadweight loss look like so? Monopolistic Competition • What are the characteristics of monopolistic competition market? What are the characteristics of products in this market? Can firm enter or exit, when and why? What is the profit-maximizing quantity and price? How to differentiate products? What is the optimal sales effort, i.e. advertising? • The basic problem – In the short-run, it is essentially a monopolist problem with positive economic profit. So what is the economic incentives to make entry occur? So in the long-run what happen? Is it actually the demand side or producer side who make the changes? Is it converging to the perfect competition or zero economic profit and how? Be careful with how you draw the demand curve in the long-run and clearly P 6= minATC necessarily! Game Theory and Oligopoly • What is a game? A game (in ECON 101) consists of PAP “Players-Actions-Payoffs.” How to write a payoff table with all the elements of PAP? • What is a dominant strategy? Action A is a dominant strategy if “No matter what my opponent does, I’m always better off doing action A.” • Can you find the outcome of the game? What is the equilibrium of a game? Recall the PAP – Players do what Actions and receive what Payoffs. • What is oligopoly? What are the characteristics of firms in oligopoly? How is game theory applied to the interactions of firms in the oligopoly settings? What is collusion of firms? Does it always work? 2