Exam 3 Review Topic 13 Market Power II Characteristics of Oligopolies 1 Few Firms 2 Identical Products 3 Free entry and exit Game Theory a branch of mathematics and economics that studies strategic behavior Strategic Behavior when payoffs to a firm or person depend not only on what they choose to do but what their opponent chooses to do Choose the Nash equilibrium and the cooperative outcome in the game The units are in number of weeks grounded A Confess Don t Confess Confess Don t Confess B A 3 weeks B 3 weeks A 7 weeks B 0 weeks A 0 weeks B 7 weeks A 1 week B 1 week Consider the oligopoly market with two firms Choose the Nash equilibrium and cooperative outcome B Collude Compete Collude Compete A 100 B 100 A 200 B 0 A 0 B 200 A 75 B 75 Topic 14 Anti Trust What is the goal of Anti trust laws Two laws against Anti Trust 1 Sherman Act 2 Clayton Act Formula HHI S1 2 S2 2 S3 2 SN 2 What does the HHI measure A A B C D E 14 20 36 12 18 33 Firm Number of Market Shares Calculate the HHI in the given market HHI 2360 Suppose the FTC won t allow a merger that increases the HHI by more than 500 New HHI 3080 Will the FTC allow firm B and E to merge NO Price Cost Margin P MC P 1 Ed What is the Price Cost Margin Markup over Marginal Cost Formula Practice What is the price cost margin in firm Blue if the elasticity of demand is 3 What is the price cost margin in firm Red if the elasticity of demand is 0 5 2 Two ways the government can regulate prices Specifically talked about in this chapter 1 Marginal Cost Pricing How Price ceiling at marginal cost 2 Average Cost Pricing How Price ceiling at average cost Topic 15 Information Two types of information 1 Full Information Definition All parties have same information 2 Asymmetric Information Definition One party has all information Problem Consider Full Information Asymmetric information can lead to a break down in the market known as Lemon s Good iPhone Bad iPhone bought and sold in the market Which kinds of iPhones will be Good Bad Buyer 400 100 Both Seller 250 100 Consider Asymmetric Information Good TV Lemon Buyer 1000 400 Seller 700 500 Which kinds of TV s will be bought and sold in the market Good Bad Both Calculate the Expected Value or the amount the buyer offers the seller if the TV is expected 60 good EV 700 Will the buyer and seller be able to make a deal with that offer Yes Define adverse selection only people that need it most will buy insurance Define moral hazard People that have insurance are more risky Topic 16 Externalities and Public Goods What is an externality Additional cost or Additional benefit to society Additional cost or benefit Quantity too high or too low Efficient Point Example Solution Positive Benefit Low MSB S Education Subsidy Negative Cost High MSC D Smoking Tax Vaccination Pollution Coase Theorem Through private bargaining efficient outcome can be achieved Two ways efficient outcomes can occur 1 Property rights are well defined 2 No cost of bargaining When only one person can consume a good at a time it is called Rivalrous When a person can be prevented from consuming a good it is called Excludable Yes No Private goods Natural monopolies Common resources Public Goods Yes No Fill in the table with the correct types of goods Rivalrous Excludable The free rider problem arises with public goods The tragedy of the commons arises with common resources Topic 17 Labor Markets The decision workers must make is between working labor and not working leisure This decision depends on the wage w that is being offered Two effects that determine wage and hours worked 1 Income effect wage increases so they work more 2 Substitution effect wage increases so the opportunity cost of leisure rises aso people work more Label the following graph Income Effect Substitution effect Substitution Effect income effect Labor Supply increases if Labor Demand increase if 1 More people work 1 MR or P increases 2 Reservation wage falls 2 More productive workers 3 Wealth falls Labor supply is derived from whom Workers Labor demand is derived from whom Firms How do firms decide how many workers to hire MRPL W What is MRPL Increase in revenue from 1 more worker Formula MRPL TR L TR Q Q L MR MPL Competitive Firms only MRPL TR L P MPL Labor demand is the same thing as the MRPL curve Profit maximizing number of workers to hire Wage MRPL Complete the following identity MRPL Wage MR MPL W MR W MPL MR MC Formula Unemployment rate U U E E employed U unemployed U E labor force Not included in unemployment rate 1 Younger than 16 years old 2 Institutionalized people 3 Active military 4 Not looking 4a Students 4b Discouraged workers
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