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UW-Madison ECON 101 - Final Review Sheet

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Economics 101Fall 2006The Final Review Sheet (Prof. Kelly)Note: This is a list of important and key points for topics after the second midterm.This list should be used together with the previous two review lists as the final willbe cumulative. As before, these review sheets should serve as a checklist for you tosee whether you have studied everything you need to for the final. To do well in thefinal, you should focus on your lecture and section notes, as well as the practicequestions. Good luck in your study!MONOPOLY1. Definition and fundamental sources of Monopoly.---Barriers to entry (examples?): a. exclusive ownership of a key resource; b. exclusive right assigned by the government; c. economies of scale; d. threat of force or sabotage.2. Natural Monopoly.---arises where it’s more efficient for a single firm to serve the society. (Examples? What will happen if we have more than one firm in the market?)3. Profit Maximization Condition (for a single-price monopoly): MR=MC.a. The demand curve facing a monopoly is the same as the industry demand curve;b. MC and ATC are similar to those for perfectly competitive firms;c. MR is less than the price: MR<P (why?); IMPORTANT: if demand is linear, P=a-bQ (a, b are positive constants), then marginal revenue is: MR = a-2bQ.(Math: TR=P*Q=aQ-bQ2, MR=dTR/dQ=a-2bQ.)d. The Monopoly can earn an economic profit even in the LR (there is no entry!).4. Inefficiency of Monopoly.a. Compared to an identical perfectly competitive industry, output is less and price is higher with a monopoly;b. Less output and higher price will result in a loss in Consumer Surplus (CS) relative to the CS found under perfect competition and an increase in Producer Surplus (PS) relative to the PS found under perfect competition---and there will be a Dead-Weight Loss with the monopoly (Be careful: does PS have anything to do with the ATC curve?);c. DWL, which measures the inefficiency of the monopoly, is graphically the area between the demand and MC curves for units between the monopoly quantity and the efficient quantity.5. Ways for policy makers to correct the inefficiency.a. antitrust laws;b. regulations (AC regulation and MC regulation);c. public ownership.6. Price Discrimination--selling different units of a good/service for different prices.a. price discrimination captures some Consumer Surplus and increases the monopoly’s total revenue;b. forms of price discrimination (and examples?).(1) First-Degree price discrimination;(2) Second-Degree price discrimination;(3) Third-Degree price discrimination.OLIGOPOLY1. Definition---Between Monopoly and Perfect Competition.A market structure where only a few sellers offer similar or identical products.(How is it different from the Monopolistic Competition? Examples?)2. Oligopolistic Markets.A: Key feature: tension between cooperation and self-interest.a. The group of oligopolists is better off if they cooperate and act like a monopoly --- producing less and charging a higher price; b. But every oligopolist has an incentive to act on his own as it cares only about its own profit; àability to cooperate is limited.B: Duopoly: an oligopoly with only TWO members.---simplest form of oligopoly!C: Collusion; Cartel.3. Equilibrium for an oligopoly.a. it’s often difficult for oligopolies to form cartels;---antitrust laws; unstability of cartels.b. Our notion of equilibrium from the lecture;c. when firms in an oligopoly individually choose production to maximize profit, they end up somewhere between perfect competition and monopoly;---monopoly quantity < oligopoly quantity < competitive quantity;---monopoly price > oligopoly price > competitive price.d. the size of an oligopoly: an oligopolistic market looks MORE like a competitive market if there are MORE sellers in the oligopoly!4. Some Game Theory.a. Definition--- a situation where the players or participants' payoffs depend both on own actions as well as on rival's actions.;b. Four elements to describe a game.1. players;2. rules: when each player moves, what actions are possible, what is known to each player at the moment they move…;3. outcomes;4. payoffs as a function of the outcomes.c. Dominant Strategy;IMPORTANT EXAMPLE: Prisoner’s Dilemma! (Definition? What real-life situations can be represented as a prisoner’s dilemma game?)d. public policy toward oligopolies.---restraint of trade;---the Antitrust laws;---controversies over Antitrust Policy.MONOPOLISTIC COMPETITION1. Definition---a market structure where many firms sell products that are similar but not identical.2. Characteristics:a. Many Sellers;b. Product Differentiation;c. Free Entry. Note: you need to contrast these to those in perfect competition!3. Short-Run.---product differentiation gives the seller in a monopolistically competitive market some ability to control the price of its product.4. Long-Run (free entry).a. price exceeds marginal cost (Why?);b. price equals ATC.---firms in monopolistic competition also earn zero economic profit as in perfect competition. (Question: why a firm will continue to operate if it is earning “ONLY” zero economic profit?)5. Monopolistic Competition VS. Perfect competition.a. Excess Capacity;b. Markup over MC.6. Welfare of Monopolistic Competition.---inefficiency:a. one source is the markup of price over MC;b. another source is the externality effects from entry (the product-variety externality and the business-stealing externality).FACTOR MARKETSWe considered only the labor market (our work here could be extended to other types of factor markets). Important assumptions: labor market is competitive, product market is competitive.Firms will hire labor up to that point where the marginal cost of hiring an additional unit of labor is equal to the additional revenue that the firm gets from hiring that additional unit of labor. The firm thus needs to equate the marginal factor cost (MFC) to the marginal revenue product of labor (MRPL) and hire that amount of labor where these two are equal. The marginal revenue product of labor is found by multiplying the marginal revenue from selling additional units of the good (in the case of a firm in a perfectly competitive industry the marginal revenue is equal to the price of the product) times the marginal product of the unit of labor. The marginal product of the unit of labor tells you the addition to total product the firm receives when it hires the additional unit of labor and then when the firm multiplies this by


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UW-Madison ECON 101 - Final Review Sheet

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