Exam 2

Question 1

Market power

Answer 1

When firms are able to restrict competition to keep prices above marginal cost

Question 2

Monopoly

Answer 2

100% market power

Question 3

Strategy to gain market power

Answer 3

Limit competition (sustain any factors that do this)

Question 4

Market strategies to restrict competition:

Answer 4

• Guarding trade secrets
• Control of essential resource
• Exclusive contracts (Coke on campus)
• Collusion (form a cartel, agree on price, act as a monopoly)

Question 5

Non-market strategies to restrict competition

Answer 5

• Patent or trademark protection
• Trade regulations
• Government licensing
• Govt or NGO certification

Question 6

Optimal sales target

Answer 6

Where marginal revenue equals marginal cost

Question 7

If MR > MC…

Answer 7

Increase sales, firm could make a profit by selling one more unit

Question 8

If MC > MR…

Answer 8

Avoid sales, firm will lose money selling one more unit

Question 9

Optimal price

Answer 9

Given optimal sales target, price is found as markup over cost where markup factor depends on demand for the product

Question 10

Firm with market power sets price (1) and output (2) than efficient levels

Answer 10

(1) - higher, (2) - lower, too few units being produced

Question 11

Perfect price discrimination:

Answer 11

Each consumer is charged a price equal to her willingness to pay

• No social inefficiency, but all surplus goes to producer
• Example: dutch auction

Question 12

Imperfect price discrimination

Answer 12

Groups of consumers are charged different prices

• Profits increased relative to single price but not as high as perfect
• Consumer surplus decreased but not equal to 0

Question 13

Under imperfect, profit and socially efficient are…

Answer 13

Different. There is a gap between the profit and socially efficient max because of the step nature of imperfect

Question 14

Players

Answer 14

Decision makers within the game

Examples: firms, government, interest groups

Question 15

Strategies

Answer 15

Decision choices

Examples: price, products, advertising, campaigning, lobbying, regulation

Question 16

Payoffs

Answer 16

Outcomes of the decision choices (in terms of profits or losses usually) –> politics, probability of winning

Question 17

Dominant strategy

Answer 17

A strategy that results in the highest payoff for a player regardless of what strategy their rival plays

Question 18

Secure strategy

Answer 18

In absence of a dominant strategy, play the strategy that guarantees the highest payoff given the worst payoff

Question 19

Think like your Rivals

Answer 19

In absence of a dominant strategy, look at the game from your rivals perspective

Question 20

Nash equilibrium

Answer 20

A condition describing a set of strategies in which no player can improve her payoff by unilaterally changing her strategy given her rivals strategy

Question 21

Extensive-form Game

Answer 21

Players, available information, available strategies, resulting payoffs and the sequence of moves

Question 22

Subgame perfect equilibrium

Answer 22

A set of strategies that allows no player to improve his own payoff at any stage of the game by changing strategies -> work backwards from your rivals strategy

Question 23

Role of government:

Answer 23

-To promote competition

Question 24

Antitrust policies

Answer 24

US has enacted to make it illegal to attempt to monopolize a market
-Department of Justice uses industry sales concentrations as an indication of the level of competition

Question 25

4-Firm Concentration Ratio (C4)

Answer 25

- The fraction of the industry sales that goes to 4 largest firms in the industry - A C4 closer to 1 means uncompetitive industry (sum all, 1 means lacks competition)

Question 26

Herfindahl-Hirshman Index (HH)

Answer 26

- Sum of squared market shares of firms in an industry multiplied by 10,000 - HH above 2500 signals uncompetitive industry (FTC will look into it over this number)

Question 27

When to export?

Answer 27

- When the world price is above the domestic price, the domestic industry has the comparative advantage - Domestic industry exports to world

Question 28

When economy opens up border...

Answer 28

TAKES price, does not make price

Question 29

Exports enhance welfare of domestic country because:

Answer 29

Producer surplus increases more than consumer surplus decreases

Question 30

When TAKES world price...

Answer 30

Excess supply, more willing to ship to the rest of the world, whole area gained from trade

Question 31

When to import:

Answer 31

When the world price is below the domestic price, foreign producers have the comparative advantage -Domestic industry imports from the world

Question 32

Imports enhance the welfare of the domestic country because:

Answer 32

Consumer surplus increases more than producer surplus decreases

Question 33

When Imports...

Answer 33

Takes lower world price, shortage in domestic supply so must import, area gained by trade

Question 34

Tariff

Answer 34

A tax that is placed on imports | -Directly affects the domestic price charged on imports

Question 35

Tariffs result in:

Answer 35

- Higher domestic prices - Under-consumption in the domestic market - Over-production by the domestic producers - Less imports to the domestic market

Question 36

Quota

Answer 36

Maximum quantity placed on imports, indirectly affects the domestic price by creating a situation of excess demand

Question 37

Quotas result in:

Answer 37

- Less imports to the domestic market - Under-consumption in the domestic market - Over-production by domestic producers - Higher domestic prices

Question 38

Tariffs v. quotas

Answer 38

- Tariffs raise revenue, quotas do not | - If quotas are combined with licensing fee, can raise revenue

Question 39

Which can cause more inefficiency?

Answer 39

Quotas: If licensing fee does not take away from price premium, foreign producers will have an incentive to lobby --> spend resources which leads to more inefficiency

Question 40

Why do firms lobby for license?

Answer 40

When entering a market where there is a quota, the price is higher than the world price so there is a potential for foreign gains

Question 41

If fee = (Pq - Pw)

Answer 41

Government revenue

Question 42

If fee < (Pq - Pw)

Answer 42

Split between foreign gains and government revenue

Question 43

Less restriction means:

Answer 43

Less inefficiency

Question 44

Why do nations adopt trade restrictions?

Answer 44

- National Defense - Retaliation against dumping (selling lower than production costs in foreign markets) - Infant Industry argument - Special interests influences

Question 45

FG =

Answer 45

[(Pq - Pw) - Fee] * imports | Less foreign gain, less inefficiency

Question 46

Do trade restrictions save jobs?

Answer 46

Overall, no. Imports and exports linked through income creation, import restrictions raise prices on inputs, and jobs will be lost in industries that rely on cheap imported material.