Lecture 1 Flashcards
(36 cards)
What is the formula for profits (π) in producer theory?
Profits π = revenues − costs.
How are revenues usually calculated in producer theory?
Revenues are usually calculated as price × quantity (pq).
What is the marginal cost at quantity q?
Marginal cost mc(q) = ∂C(q)/∂q.
What is the average cost at quantity q?
Average cost ac(q) = C(q)/q.
How are total costs decomposed in terms of variable and fixed costs?
C(q) = VC(q) + FC.
Are sunk costs relevant to optimization decisions?
No, sunk costs are irrelevant to the optimization.
When is the optimal quantity q* reached in terms of marginal analysis?
q* is optimal if marginal revenue equals marginal cost: mr(q) = mc(q).
What characterizes perfect competition in pricing?
Each producer has no effect on market values; price is given.
What is the profit condition under perfect competition?
π = pq − C(q), with optimality when p = mc(q).
What is the long-run profit condition in perfect competition?
In the long run, profits are zero due to the number of firms.
What characterizes monopoly pricing?
The monopolist determines both price and quantity through the demand function.
What is the profit function for a monopolist?
π = p(q)q − C(q).
How do price and quantity in a monopoly compare to a competitive market?
Monopolies produce less quantity at a higher price.
What does willingness to pay (WTP) represent?
WTP is the maximum price a consumer would pay; represents marginal value.
How is consumer surplus (CS) calculated?
CS is the sum of (WTP − price paid) over all units.
What does total surplus represent?
Total surplus = Consumer Surplus + Producer Surplus (and government revenue if any).
What is Pareto efficiency?
An outcome is Pareto efficient if no one can be made better off without making someone else worse off.
What distinguishes game theory from consumer/producer theory?
Game theory considers the actions of other agents in strategic interactions.
What elements define a game in game theory?
Players, possible actions for each, and payoffs for each outcome.
What is a Nash Equilibrium (NE)?
A set of actions where each player is best-responding to the others.
What is the normal form of a game?
A matrix showing outcomes and payoffs for each action combination.
Do Nash Equilibria always exist?
Yes, but they may not be unique and can be in mixed strategies.
What is a mixed strategy?
Randomizing between actions that yield the same expected payoff.
How are sequential games represented?
As extensive form trees with branches for moves and leaves for payoffs.
