disccusion 8,9,10

Question 1

Five assumptions of a (perfectly) competitive market:

Answer 1

1. There are lots of buyers and sellers in the market.
2. Each seller faces a perfectly elastic (individual) demand curve. Firms can change their level of output without affecting the price. Firms are price takers.
3. There are no barriers to entry (not necessarily free).
4. Sellers and buyers are fully informed (perfect information).
5. Products are homogeneous, or identical.

Question 2

where does the agency problem exsist

Answer 2

The agency problem exists in corporations, universities, government bureaus, and families.

Question 3

Shirking:

Answer 3

If your boss cannot observe how hard you work and pays you a fixed salary, you might not want to exert effort because effort is costly to you. But this is not what your boss wants because the harder you work the more likely you produce quality outputs.

Question 4

difference between short run and long run

Answer 4

The SR is when the firm faces fixed costs, and the LR is when it doesn’t.

Question 5

We have economies of scale when LRAC

Answer 5

is falling

Question 6

diseconomies of scale when LRAC

Answer 6

is rising

Question 7

MC is the

Answer 7

economic cost incurred in producing the next unit

Question 8

(Socially) optimal production is where (long question)

Answer 8

P = MC (marginal cost pricing).
- Producing at this point is Pareto Optimal, you can’t make anyone better off without making someone else worse off.

Question 9

Pricing below or above MC brings

Answer 9

Pricing below or above MC brings about a misallocation of resources

Question 10

• Produce if

Answer 10

p>AVC

Question 11

Shut down if

Answer 11

p<AVC

Question 12

We don’t look at AC because

Answer 12

e don’t look at AC because in the short-run fixed costs are sunk (cannot be
recouped).

Question 13

Marginal Revenue (MR):

Answer 13

revenue the firm gets from selling an additional unit

Question 14

If MR>MC,

Answer 14

selling one more unit you get more additional revenue than additional cost

Question 15

If MR<MC,

Answer 15

what you get from selling the last unit is less than the cost of producing it.

Question 16

Short-Run versus Long-Run Profit

Answer 16

Short-run profit is positive. But this is not stable. In the long-run, perfectly competitive firms can enter and they will enter until each is making zero economic profit. (Note that accounting profits are still positive even if economic profits are zero. This just means that entrepreneurs are indifferent between operating their own firm and earning their opportunity cost elsewhere.)

Question 17

Two conditions for monopoly

Answer 17

1. No close substitutes
2. Barriers to entry exist (ability to keep out new competitors).

Question 18

A Pareto-optimal policy…

Answer 18

A Pareto-optimal policy will make some economic agents better off and no economic agent worse off.

Question 19

A cartel (if constitutes of all firms in the industry) would set

Answer 19

MC = MR for the entire market.

Question 20

By joining the cartel and restricting output, the individual firm receives

Answer 20

positive economic profits. This is because the individual firm is not competing as harshly as it was against other firms.

Question 21

Many cartels are not stable due to free-riding problems.

Answer 21

Firms have incentive to cheat and over produce, which is good for their profits, but bad for the
overall cartel.

Question 22

It is hard for antitrust authority to distinguish

Answer 22

between cartel/price fixing and
oligopolies

Question 23

Firm degree price discrimination (perfect discrimination):

Answer 23

• sellers know exactly everyone’s willingness to pay and extract all consumer surplus

Question 24

• Second degree price discrimination (menu pricing):

Answer 24

sellers give consumers a menu of choices and let consumers select (ex: you can by a combo meal
or items separately, quantity discount)

Question 25

• Third degree price discrimination (group pricing):

Answer 25

• set different prices for different groups of people (ex: student discount)

Question 26

Perfect price discrimination

Answer 26

(socially efficient)

Question 27

Group pricing

Answer 27

(more efficient than monopoly single pricing)

Question 28

When marginal revenue is positive

Answer 28

demand is price elastic

Question 29

When marginal revenue is negative

Answer 29

demand is price inelastic.