Final Exam Preview Monday 8 00 9 50 AM at 100 Thomas 2 Questions 1 What is economics definition Positive vs normative Micro vs macro 2 Production possibility Frontier Slope law of increasing marginal opp cost What shift the curve Point inside outside Finding a point on the PPC Calculation with chart wheat cotton 2 Questions 1 Absolute Comparative advantage Finding opp cost 5 Questions 1 Supply Demand Law of Demand Law of supply Qd Qs Change in demand vs in Qd in supply Shifts cause what to shift Effect on P and Q Calculate P and Q Excess Demand or Supply Price floor and price ceiling 4 Questions 1 Elasticity Definition Calculate midpoint point slope formula Applications relationship between elasticity and TR Maximize TR E 1 Determinants Other elasticity Income cross price Price elasticity of supply substitute complementary Short run long run 7 short run costs MC FC VC TC AFC AVC ATC Short Run MC W MPL Marginal product of labor Law of diminishing marginal product Relationship between M and Average Long run costs Returns to scale 4 Questions 1 Cost of Production WHITE 5 Questions 1 Perfect competition Assumptions Profit maximizing level of output Table of graph adjustment from short run to long run short run supply curve MR P 1 1 E 4 Questions 1 Monopoly Find Qm Q of monopoly Pm Qc Pc Q of perfect competition Find CS PS for mono and perfect com DWL Lerner Index 5 Questions 1 Oligopoly 3 questions game theory Dominant Nash equilibrium maximin sequel strategy backward 2 questions anti trust law FTC Guideline for challenging a merger Government 1 Question 1 Environmental Economist Externality What happen if not corrected Pollution permits NO question on cost theorem Public goods Rival non rival exclusive non exclusive Free rider problem and drop in the bucket problem 1 Question 2 Questions 1 Pareto Efficiency 1 Price discrimination Different degree Necessity conditions 3rd degree 1 Question asymmetric information 2 Questions 1 Excise Taxes Buyer s price Seller s price Proportion at tax paid by buyers CS PS Government DWL Q with tax P with tax 1 Every contract combination or conspiracy in restraint of trade is declared to be illegal 2 Every person who shall monopolize or want to shall be deemed guilty of a felony Naturally monopolized not illegal Rule of Reason A firm must behave in unreasonable manner Being a monopoly is not illegal per se ShermanAct 1914 Clayton Act Outlawed 1 Price discrimination motive for less competition 2 Tying Contracts ex Microsoft and window 3 Mergers All are substantially lessen competition Herfindahl Hirschman Index HHI HHI the sum of the square of the percentage of total sales for each firm added up across all firms added up across all firms in industry Firm 1 2 3 4 HHI 1600 900 400 100 3000 FTC Guideline for challenging a merger of total sale 40 30 20 10 Calculate the pre merger HHI Calculate the post merger HHI Using the post merger HHI HHI 1000 higher competitive no challenge 1000 HHI 1800 Challenge if change in HHI 100 HHI 1800 Challenge if change in HHI 50 Low competitive Ex Suppose there are 12 firms 8 firms are 10 4 firms are 5 and HHI 900 1 if two of the smaller firms merged 9 firms each with 10 2 firms each with 5 New HHI 950 Not challenging 2 If two larger firms merged 1 firm 20 6 firm 10 4 firm 5 New HHI 1100 Challenge TAX 1 Excise tax a tax levied on a particular product Per unit excise tax a specific amount t that is charged on each unit of the good that is sold 2 Legal incidence who bears the burden Legal incidence of a tax who pays the tax by law 3 Economic Incident of tax who actually ends up paying the tax A per unit excise tax is levied on consumers will shift the demand curve down decrease in demand by an amount exactly equal to the tax Has the same slope subtracts tax from vertical equation New demand equation Example for TAX 1 Buyer Demand Q 100 2p Supply Q 60p 3p 100 2p 60 3p P 32 Q 36 Original equilibrium Now a suppose a per unit excise tax t 10 is levied on the consumers New demand p 40 1 2Q Q 80 2p 80 2p 60 3p Pt 28 Qt 24 To find the new Demand curve 1 First change the equation to P form 2 Subtract tax from the new form 3 Then make the new from to Q equation Pt t is the price that buyers pays 28 10 38 If the tax is levied on consumer then pt 28 is the price that sellers receive Graph Consumer pays 6 more and producer pays 4 less Economic Incidence of the tax Buyers pay 6 10 60 Sellers pay 4 10 40 Government Revenue Qt x Tt 24 x 10 240 Other things equal the steeper the demand curve the larger the proportion of the tax paid by buyers 2 Seller A per unit excise tax levied on producers will shift the supply curve up decrease in supply by an amount exactly equal to the tax Example D Q 100 2P S Q 60 3p If a 10 per unit tax is levied on suppliers Original p 20 1 3Q New p 90 1 3Q New supply curve is shifted up 100 2p 90 3p P 38 buyer s price p t 28 seller s price You can use either way Buyer or Seller The only difference is that the price that you get for Buyer new supply equation is for the seller s price and Seller is buyer s price Economic Incidence of a tax E price elasticity of Demand M price elasticity of Supply Buyer s proportion m E m Seller s proportion E E m If the demand is perfectly inelastic 1 100 consumers burdens The legal incidence of a tax does not affect the economic incidence of a tax Quick Formula Demand E 1 slope x P Q Supply m 1 slope x P Q Buyer s proportion m E m Seller s proportion E E m Buyer s price Pt m E m Seller s price Pt E E m x t Market with Asymmetric Information Example Market for used cars Lemon Low quality car Plum high quality car Willing to pay Lemon 200 Plum 400 Buyer believes there is a 50 choice of a lemon and 50 choice of plum Risk Neutral buyer 3000 willing to pay 0 5 x 2000 0 5 x 4000 3000 1 Suppose that the supply of cars of a price of 3000 is 5 cars of plum 15 cars of lemon Buyers now think that there is a 25 chance of a plum and 75 of lemon Now a Risk neutral uyer would offer 2500 0 25 x 4000 0 75 x 2000 2500 2 Suppose that the supply of cars of a price of 2500 is 3 cars of plum 12 cars of lemon Now a risk neutral buyer would offer 2400 0 2 x 4000 0 8 …