Test 4 econ

Monopolistic competition characteristics

• non price competition

• many/diff sized firms

• differentiated products

• firms are price makers

• low barriers of entry

• no profit in long run

• firms are unefficent if unregulated

• output at MC=MR, price at the output’s demand hence under produces and overcharges

excess capacity

difference between the firm’s profit-maximizing output (MR=MC) and output where total costs are minimized (ATC=MC)

monopolistic competition will only produce output if

MR= or greater than MC

too many firms enter market

existing firms will see their MR and D go down until D= ATC so no profit is made long run.

market has a loss…

firms leave the market which makes MR and D go up for existing firms until ATC= D

Oligopolies characteristics

• few large firms

• products are differentiated and have substitutes

• non price comeptition

• price makers

• inefficent when unregulated

• high barriers to entry

• make MR=MC output but charge the demand’s price at that output

• make profits in long run

how to oligopolies make profit with barriers

name brand, economies of scale, geographic control of inputs

mutual independency

a firm’s decisions effect profits and losses of their comepetitiors. Firms must watch eachother.

oligipolies colluding eachothers due to interdepency

a cartel

game theory

study of how oligopolies collude in competitive markets.

price leaderships

firms following another’s strageties by copying

domaint stragety

the descion that brings more profit regardless of other’s firm decisions

externalities

benefits or costs that fall on people who don’t buy or produce products. EX: smell of cigarettes in public spaces is a negative externality to non smokers

spill over

another word for negative externalities

externalities of consumption

spill over costs or benefits caused by consumers of a good

externalities in production

spill over costs or benefits caused by producer of a good

how to graph externalities

add (if positive) or subract externalities from supply curve because supply = marginal private cost IF it is a externality in production.

if it is an externality in consumption, add (if positive) or subtract externality from demand curve because demand= marginal private benefit

negative externality in production

negative exterality in consumption

socially optimal point

when other curve = social MSB or MSC

free rider

people who benefit without paying,  underprovision by private markets. This is caused by non exclusionary goods

public good

a non-exclusion and non-rivalry good.

non exclusion- you can’t exclude people who dont pay

nonrivalry- extra consumption doesn’t make it worse for anyone

monopolistic product differentiation?

advertising, geographic location, name branding, quality,

horizontal differntation vs vertical

horizontal involves taste preferences on which product is better, not quality while vertical is based on price, not quality.

hortzional ex: chocolate vs vanilla ice cream of same brand

vertical: tom and jerry ice cream vs great value

rank elasticities of perfect competition/monopoly/monopolistic

perfect elasticity: perfect competition

mid-elastic monopolistic

least elastic: monopoly

monopolistic profit in long run? Monopoly in long run?

Monopoly= Price = ATC at min ATC output level so zero profit, efficient

monopolistic= Price = ATC, not min ATC so its unefficent and makes zero profit

consumer surplus in monopolistic vs perfect competition

consumer surplus in perfect competition is higher because perfect competition is price takers. Consumer surplus is lower in monopolistic because prices are maximized

why is there excess capacity in monopolistic competition and not perfect?

Because monopolistic compeitions arent effeicent. They don’t produce at min ATCcompetitions

What are the three types of mergers?

Horizontal (same industry, same stage), vertical (different stages of production), conglomerate (unrelated industries).

Why might the government block a merger?

If it substantially lessens competition, creates monopoly power, or raises prices for consumer

What is tacit collusion?

firms coordinate their behavior without communication, often through price leadership or following observed actions.

What makes tacit collusion easier? or harder?

EASIER: Few firms, similar costs, stable demand, frequent interaction, and small gains from cheating.

HARDER:Many firms, different costs, fluctuating demand, secret price cuts, large potential gain from cheating.

In a cartel, what happens if one firm cheats by increasing output?

Market price falls, cartel profits decrease, cheating firm gains temporarily but industry profits suffer.

marginal social cost of pollution.

The additional cost imposed on society from one more unit of pollution (includes private cost + external cost).

Define marginal social benefit of pollution.

The additional benefit to the polluter (e.g., cost savings from not reducing pollution) from one more unit of pollution.

What happens to price and quantity when a negative externality is internalized?

Price increases, quantity decreases (moves toward social optimum).

What happens to price and quantity when a positive externality is internalized?

Price decreases (or subsidy reduces net price), quantity increases.

How would the government correct a positive externality?

Subsidies, vouchers, or direct provision (e.g., public education, vaccines).

What type of policy corrects a positive externality?

Subsidies or Pigouvian subsidies (negative tax).

Difference between Coase Theorem solution and Pigouvian tax?

Coase: private bargaining without government (requires low transaction costs, clear property rights). Pigouvian tax: government sets a tax equal to external cost.

What is a market for the right to pollute?

tradable permits system (cap‑and‑trade) where firms buy/sell allowances to emit a set total amount.

What happens if number of tradable permits decreases?

price of permits increases which result in eqilbirum pollution emitted quanity descreasing

what happens if number of tradable permits increase

price goes down and eqilbirum of pollution emitted quanity goes up

advantage and disadvantage of tradable pollution permits

advantages: firms with lowest reducing pollution (abatement) reduce the most, total cost minimized.

disadvantage: requires monitoring and enforcement.

relationship between property rights and common resources

people will overuse without property rights, which is called the problem of the commons. No one has an incentive to conserve because others will overuse if they don’t. They ignore the external cost of depletio

How does public good differ from common resources?

Public good is non rivalry which mean one more person using it doesn’t mean someone else can’t. Ex: fish is a common resource because it is rivalry. More people fishing means less people can in the future.

why do individuals not want to pay for public goods?

free rider problem, each person hopes others will pay, so private provision is too low.

monopolistic competition makes a profit

ATC is less than demand price

monopolistic competition making a lost

ATC is more than demand price

monopolistic comeptition in long run

demand price= ATC

How to calculate Herfindahl‑Hirschman Index (HHI)?

Sum of squared market shares (as whole numbers). Example: 30² + 30² + 40² = 900+900+1600=3400

What is Nash equilibrium?

each player’s response to the other player is best stredegy, no one wants to change

In a payoff matrix, how does collusion equilibrium differ from Nash equilibrium?

in collusion equilbirum, each choose the high profit unless someone cheats

Tiit‑for‑tat strategy in repeated game?

cooperate at first but do what the opponent did last round

In a repeated game, if both play tiit‑for‑tat, does cheating pay?

there is short run gain profit from cheating but in the long run, it isn’t beneficial b/c long run loss from retaliation > stable cooperation can occur

On MSB/MSC graph, what is pollution without government intervention?

where marginal social benefit is zero and marginal social cost is maxx

 On MSB/MSC graph, what is optimal Pigouvian tax?

The vertical distance between MSC and MPC at the socially optimal quantity (tax = external cost).

 Under emission standards with two firms (one lower abatement cost), which firm reduces more?

Both reduce the same in equal costs- inefficient, higher total cost

Under emission tax with two firms (one lower abatement cost), which firm reduces more?

lower abatement firm loses more, higher cost firms pay tax on remaining emissions. lower total cost