Price Discrimination, Labor Economics, and Game Theory Concepts

What is price discrimination?

Charging different prices for different units of the same good.

Give examples of price discrimination.

Lower prices for larger quantities, discounts for seniors, student pricing, matinee pricing at theaters.

Why do firms engage in price discrimination?

To capture consumer surplus and turn it into producer surplus.

What factors can prevent price discrimination?

Competition and resale.

What is perfect price discrimination?

Charging the maximum buying price for each unit of a good, capturing all consumer surplus.

What is the relationship between marginal revenue and demand in perfect price discrimination?

Marginal revenue is equal to demand.

What is deadweight loss in the context of perfect price discrimination?

There is no deadweight loss in perfect price discrimination.

What is block pricing?

Charging different prices for different blocks of units of the same good.

Provide an example of block pricing.

Charging $2 per unit for units 1-6 and $1.50 per unit for units 7 and beyond.

How does block pricing affect consumer and producer surplus?

Consumer surplus is less but still positive; the firm earns higher producer surplus.

What is segmenting in price discrimination?

Charging different groups of customers different prices.

What are some examples of segmenting?

Senior and student discounts, matinee pricing at theaters.

What condition must hold under segmenting?

Marginal revenue for each group must be the same at profit-maximizing quantities.

How do firms find the profit-maximizing quantity for each group under segmenting?

By setting the marginal revenue curve of each group equal to the firm's marginal cost.

How do firms determine the price charged to each group under segmenting?

Using the profit-maximizing quantity for each group and each group's demand curve.

What is the market demand curve under segmenting?

The sum of each group's demand curves if a single price is charged.

What is the pricing strategy under segmenting compared to a single price equilibrium?

One group is charged a higher price and the other a lower price than the single price equilibrium.

What is the extra credit assignment related to?

Finding and reading an article discussing income or wages in an economic context.

What is the requirement for the extra credit article?

It cannot be an article that has been sent before.

What should students do with the extra credit article?

Email a link to the article before the start of class.

What determines the demand for labor from businesses?

The marginal revenue product of labor (MRPL), which is calculated as MR × MPL.

What does a higher marginal product of labor (MPL) indicate?

It increases the demand for labor and subsequently increases wages.

What is human capital?

The stock of knowledge, habits, social, and personality attributes that affect a person's ability to provide labor services.

How can a person increase their human capital?

Through education and training.

What is one fixed aspect of human capital?

Inherited abilities determined by genetics.

Can college increase a person's human capital?

Not necessarily; college may act as a signal of a person's inherent human capital or ability.

Why might college graduates earn higher wages?

Employers perceive college graduates as likely being more productive due to their higher ability.

What is a compensating wage differential?

The additional income a worker must receive to accept a job with undesirable characteristics.

What are examples of compensating wage differentials?

Hazard pay, wages for high-stress jobs, and lower wages for flexible hours.

What are non-equilibrium wages?

Wages that are higher than equilibrium wages, resulting in unemployment and wage differences.

What are efficiency wages?

Wages paid higher than equilibrium to encourage higher effort and reduce worker turnover.

How do unions affect wages?

Wages are determined by collective bargaining, often resulting in higher wages for unionized workers.

What is the poverty line?

The annual income below which a family is considered poor by the government.

What does the Gini Coefficient measure?

Income inequality based on the percentage of income that poor people earn versus that of rich people.

What is the economic life cycle?

A pattern where income is low when young, increases with age, and decreases upon retirement.

What are government transfers?

Payments by the government to individuals or families to reduce poverty.

What are in-kind transfers?

Transfers in the form of goods or services instead of cash, such as food stamps and healthcare.

What is a means-tested program?

A program available only to individuals or families below a certain income level.

How can welfare programs disincentivize work?

By decreasing benefits as a person's income increases, which may discourage individuals from working.

What is the relationship between human capital and income inequality?

Differences in human capital lead to differences in wages and income.

What is the significance of productivity differences among individuals?

They contribute to wage disparities in the labor market.

What role does education play in economic mobility?

Education can enhance an individual's human capital, potentially leading to higher wages and better job opportunities.

How does discrimination affect wages?

It can lead to wage differences between groups not related to productivity, persisting despite competition.

What is the poverty rate?

The percentage of the population with incomes below the poverty line.

What might cause poverty to be a temporary situation?

Transitory decreases in income can lead to temporary poverty.

What does Game Theory study?

Game Theory studies strategic behavior in situations where each person's outcome depends on everyone else's actions.

What is a classic example of Game Theory?

The Prisoners' Dilemma.

What are the three parts of a game in Game Theory?

Players, actions the players can take, and outcomes that result from those actions.

In the Prisoners' Dilemma, what are the two actions each player can take?

Confess to the crime or don't confess to the crime.

What does the Normal Form represent in Game Theory?

A matrix with rows for one player's actions, columns for the other player's actions, and cells for the outcomes.

When is the Normal Form best used?

When representing a 2-player game where players move simultaneously.

What is a strategy in the context of Game Theory?

A strategy specifies the actions a player will take at each possible stage of the game.

What is a Best Response in Game Theory?

The strategy that results in the most favorable outcome for a player given the strategies of the other players.

What is Nash Equilibrium?

A situation where each player's strategy is a best response to the strategies of the other players.

What is a Dominant Strategy?

A strategy that is the best response regardless of the strategies of the other players.

What is a Mixed Strategy?

A strategy that assigns probabilities to each action at each possible stage of the game.

What guarantees the existence of a Nash Equilibrium?

A game with finitely many players and finitely many actions for each player always has at least one Nash Equilibrium.

What is a Dynamic Game?

A game in which players move sequentially.

What is the Extensive Form in Game Theory?

A game tree showing which player moves at each stage of the game and the actions available to that player.

How do you find the Nash Equilibrium in Dynamic Games?

By working backwards using Backward Induction.

What is a Repeated Game?

The same game played over and over by the same players, either a finite or infinite number of times.

What happens in the last period of a finite Repeated Game?

There is no incentive to cooperate since there are no future periods.

Why might cooperation be sustained in an infinite Repeated Game?

Potentially cooperating in the future provides incentives to cooperate now.

What is Backward Induction?

A method used to find the best response in the last turn first and then work backwards to find strategies for each player.

What are the key assumptions of oligopoly?

There are barriers to entry, goods may be differentiated or homogenous, and there are only a few firms in the industry.

What is the kinked demand curve?

A model where demand is elastic above the current price and inelastic below it, leading to price stability unless demand or costs change.

What happens to the profit-maximizing quantity in a kinked demand curve model?

It doesn't change unless there's a change in demand or a large change in costs.

What is the primary goal of firms in an oligopoly regarding pricing?

Firms would like to charge the monopoly price to maximize profits.

What is collusion in the context of oligopoly?

Collusion is when firms act in unison to set market prices, often forming a cartel.

What are two reasons that may prevent firms from forming a cartel?

Collusion is illegal in many countries, and firms have an incentive to cheat by charging lower prices.

What is Bertrand Competition?

A model of oligopoly where firms compete by setting prices, with the lowest price attracting all customers.

What is the Nash Equilibrium in Bertrand Competition?

P = MC (Price equals Marginal Cost).

How does Cournot Competition differ from Bertrand Competition?

In Cournot Competition, firms compete by setting quantities rather than prices.

What determines the market price in Cournot Competition?

The market price is determined by the market demand curve and the total quantity produced.

What is the relationship between Marginal Revenue and quantity in Cournot Competition?

Marginal Revenue depends on both the firm's own quantity and the quantity produced by competitors.

What is the outcome of Nash Equilibrium in Cournot Competition?

The market quantity is higher than the monopoly quantity but lower than the perfectly competitive quantity.

What is Stackelberg Competition?

A model where firms choose quantities sequentially, giving the first mover an advantage.

What advantage does the first firm have in Stackelberg Competition?

The first firm can produce a larger quantity, leaving a smaller residual demand for the following firms.

How does the overall market quantity in Stackelberg Competition compare to Cournot Competition?

The overall market quantity is higher under Stackelberg Competition.

What is the impact of Stackelberg Competition on market price compared to Cournot Competition?

The market price is lower under Stackelberg Competition than under Cournot Competition.

How do profits compare for firms in Stackelberg Competition versus Cournot Competition?

The first firm earns a higher profit, while the second firm earns less profit compared to Cournot Competition.

What factors determine which oligopoly model fits a market best?

The flexibility of firms in choosing price or quantity and whether firms move simultaneously or sequentially.