Exam #3 Study Guide Material:Exam 4/23/2015, Chafee 277, 12:30-1:45Material:- Krugman chapters 4,5,6,7,9,10- Lectures 14-20Basic Fundamental Knowledge:Chapter 11: Inputs and Costs1. The Production Function.a. Fixed Input & Variable Inputi. How does this relate to the long run and short run?-Afixed inputis an input whose quantity is fixed for a period of time and cannot be varied.-Avariable inputis an input whose quantity the firm can vary at any time.-Thelong runis the time period in which all inputs can be varied.-Theshort runis the time period in which at least one input is fixed.b. Total and Marginal cost curvesi. Understand the diminishing marginal return.-As output increases, the marginal product of the variable input declines. This implies that more and more of the variable input must be used to produce each additional unit of output as the amount of output already produced rises.ii. Understand the ATC = AFC + AVC-Average total cost is the sum of the average fixed cost and the average variable costc. The relationship between ATC and the Marginal cost curve-Average total cost,often referred to simply as average cost,is total cost divided by quantity of output produced. AU-shaped average total cost curve falls at low levels of output, then rises at higher levels.d. How does the Long run and Short run ATC look like-Thelong-run average total cost curve shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output.-There are increasing returns to scale when long-run average total cost declines as output increases-There are decreasing returns to scale when long-run average total cost increases as output increases.-There are constant returns to scale when long-run average total cost is constant as output increases.Chapter12: Perfect Competition and the Supply Curve1. Perfect Competition.a. What makes up a perfectly competitive market?i. Must have three conditions.1. Many producers and consumers2. Standardized product.3. Free entry and exits1.1 Production and Profitsa. Be able to find Total revenue and Profiti. TR= P*Q ECN 201 1st Edition-Total Revenue = Market Price x Quantity of Outputii. Profit= TR-TC-Profit = Total Revenue – Total Costb. How does a firm maximize its profits (understand when does this happens)?i. MC = MR-The optimal amount of an activity is the level at which marginal benefit is equal to marginal costii. When is a firm making a profit? A loss?-If the firm produces a quantity at which TR > TC, the firm is profitable.-If the firm produces a quantity at which TR = TC, the firm breaks even.-If the firm produces a quantity at which TR < TC, the firm incurs a loss.c. Be able to find out the following pricesi. Breakeven price-If the firm produces a quantity at which TR = TC, the firm breaks even.-If the firm produces a quantity at which P = ATC, the firm breaks even.ii. Shut-down price- A firm will cease production in the short run if the market price falls below the shut-down price,which is equal to minimum average variable cost.d. Understand the market efficiency.-In the long-run equilibrium of a perfectly competitive industry, production is efficient: costs are minimized and no resources are wasted. In addition, the allocation of goods to consumers is efficient.Chapter 13: Monopoly1. What is a Monopoly?a. Assumptions of a Monopoly market-products are not differentiated-there is only one company producing the productb. How does Monopolist keep the barriers to entry.-control of a scarce resource or input-increasing returns to scale-technological superiority-government-created barriers.c. How does a Monopoly maximize profits?i. How does a demand curve and MR curve look like for a monopolist?-to maximize profit, a monopoly produces the quantity of output at which the marginal cost of producing the last unit of output equals marginal revenue: MR = MC. Trace the intersection of these up to the demand curve to find the demand.d. Be able to calculate a monopolies profit.-The rectangle formed by the vertical line above the intersection of MC and MR up to the demand curve, thenextended over to the left/e. Why do Monopolies create inefficiency?- the losses to consumers from monopoly behavior are larger than the gains to the monopolist-There is deadweight lossChapter 14: Oligopoly1. What is an Oligopoly and why is so prevalent-Anoligopolyis an industry with only a small number of producers. A producer in such an industry is known as an oligopolist.a. What makes a market an oligopoly?- Oligopolists compete with each other for sales. Each of the firms had some market power. So the competition in this industry wasn’t “perfect.”i. Be able to calculate HHI for an industry.-“Herfindahl–Hirschman Index”-HHI = The square of each firm’s share of market sales summed over the firms in the industry.(For example, if an industry contains only 3 firms and their market shares are 60%, 25%, and 15%, then the HHI for the industry is: HHI = 602 + 252 + 152 = 4,450-In an industry with an HHI over 1,000, a merger that results in a significant increase in the HHI will receive special scrutiny and is likely to be disallowed.-According to Justice Department guidelines, an HHI below 1,000 indicates a strongly competitive market, between 1,000 and 1,800 indicates a somewhat competitive market, and over 1,800 indicatesan oligopoly.b. Different types of Oligopolies.i. Duopoly.-An oligopoly consisting of only two firms is a duopoly.Each firm is known as a duopolist.1.2 The prisoners Dilemma. (also known as game theory)-Game theory deals with any situation in which the reward to any one player—the payoff—depends not only on his orher own actions but also on those of other players in the game. In a duopoly, the interdependence between the players can be represented with a payoff matrix.a. How does a firm make a collusive decision?-When firms limit production and raise prices in a way that raises each others’ profits, even though they have not made any formal agreement, they are engaged in tacit collusion.i. The dominant strategy.-An action is a dominant strategy when it is the player’s best action regardless of the action taken by the other player.ii. Nash equilibrium.-ANash equilibrium,also known as a noncooperative equilibrium,is the result when each player in a game chooses the action that maximizes his or her payoff given the actions of other players, ignoring the effects of his or her
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