ECON 1000 1nd EditionExam 4 Study GuideHow is the price and quantity produced different in a monopoly?The price is increased and quantity produced decreased. What are anti-trust laws?It’s basically a competition policy. The purpose is to prevent un-market like activities and monopoly.How does a monopoly earn economic profit?They do so by increasing the price above the profit market price. What is the profit maximizing rule in a monopoly vs. a competitive market? How does this relate to price?In a monopoly, when MR > MC then a profit is being made, so when MR < P unlike for a competitive market which has MP = P.What is price discrimination? Is it legal? If so, provide an example. It is the selling different units of the same product at different prices. It is legal; it is greatly used in college tuition where in-state students usually pay less than out-of-state. Label the graph’s A, B, & C as revenue, revenue loss, and revenue gain.A = revenueB = revenue lossC = revenue gain What are the 3 key ideas of the marginal revenue graph?It is linear (a straight line), has the same y-intercept as the demand, and has twice the slope of the demand curve.What are the 4 steps of a profit maximizing quantity and price for a monopolist?Use the profit max rule: find Q @ MR=MC; price: read off demand curve; cost/unit: go to ATC = Qm; fin monopoly profit: area between Pm & ATC @ Qm = profit margin * Q.What does a typical supply and demand graph for a monopolist lack?Supply curve.What is the biggest anti-trust law?Sherman Act.What are the 2 sections of the act?Section 1 deals w/ agreements, so when 2+ firms are involved. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Section 2 deals w/ dominant firms, or monopolies. What is the rule of reason & how does it work?It is a way for the court to decide if a company violated the law. It is a 2 part test: 1. The accused company has to have dominant position (measured by market share) so around 75% or more AND the accused company must have taken some unreasonable/anti-competitive action to acquire or protect the dominant position.What are the 2 types of suits and whom do they apply to?A criminal suit is brought by the government to a firm and can result in heavy fines and jail time, whereas a civil suit is brought by the customer for compensation.What is an oligopoly?It is everything between a competitive market (many small firms) and a monopoly (1 dominating firm).What is recognized interdependence?It is when the profit of one company depends on what the other firms are doing and what said firm chooses to do in response. What is collusion?It is when firms get together to set a market price and quantity.What is a cartel? It is a group of colluding firms. Is the collusion of firms legal?No.When firms are colluding, what is the result of the temptation to steal customers?The price decreases as a result of this and if everyone does so then the price and quantity go back to what they were in the competitive market.What is the cartel cheating problem?If everyone is charging the cartel price, which is P>MC, then there’s more incentive to cheat each other,which as stated above, results in the return to a market price and quantity.When does an externality occur?It exists when a person/group’s choice/action causes uncompensated costs or benefits to others.Are externalities good?They can have costs and benefits.What should be the proper outcome of the following scenario?A factory is polluting the river which flows through a town, therefore the people are getting dirty water. The best fix would be to install a filter, who should do this if:Factory values putting waste into river @ $1 milTown values clean water @ $1.5 milSince the town values clean water more than the factory in polluting it, they have the right to decide. The efficient choice will be to offer the factory between $1-1.5 mil to install a filter.What is a free-rider problem?It is when someone benefits from a decision without paying for it. In the clean water example, if everyone was asked to donate money for the filter and one person did not, they would be a free-rider because they did not pay, but are still benefitting. What is a drop in the bucket problem?It is when one person’s decision does not make much of a difference to the outcome. The person’s decision to not donate wouldn’t make a difference because enough money would still be collected. What is non-excludability?It is when it is impossible to prevent someone from using a good.Give an example of an excludable and non-excludable good.Excludable: most anything that you can buy: food, clothes, books, etc.Non-excludable: public goods such as water, air, national security.What is non-rival consumption?It is when a good is provided for everyone, no matter what.In what ways can an externality be solved & what is the economist’s choice?Two ways to solve an externality: law or tax.Economists’ preference is tax. What is absolute poverty?How much people have (wealth) or how much you earn (income).What is relative poverty?How (equally/not) is wealth or income distributed across population.What are some sources of income?Resources you own and the price you can sell them at, property such as land, stock, back accounts, and the money you get from the government.What is labor income?It is wages and salaries that one receives.What determines how much you receive? Many determinants exist: skills physical characteristics, human capital – learning/knowledge, and compensation differentials.What is income capital?It is the income from property (land, financial assets, housing), rental, interest, dividends.What is transfer income?It is income one receives from government programs.What are the 2 types of transfer programs? Give examples of each.Means tested: have to qualify due to income, so for the poor only  welfare, food stamps, Medicaid.Not-means tested: for all, so Social Security & Medicare. In what ways can income be lost during redistribution?Taxes, people may hide money, lack of efficiency.What is the biggest source of the loss?Lack of efficiencyHow do you know how much to redistribute?It depends on various factors such as levels of absolute & relative poverty, reasons why part is rich other poor, much more. Other key themes to know about for finalScarcityOpportunity costComparative and absolute advantageSupply and