Exam #3 Review - Microeconomics

What are the four conditions characterizing perfect competition?

Many buyers and sellers, homogeneous products, free entry and exit, perfect information.

Fill in the Blank: A firm maximizes profit where ___________ = ___________.

marginal cost (MC) = marginal revenue (MR).

Define homogeneous products in the context of perfect competition.

All firms sell identical products.

When will a firm earn a profit in the short-run?

If price (P) > average total cost (ATC).

What is the short-run supply curve for a perfectly competitive firm characterized by?

The portion of the MC curve above average variable cost (AVC).

Fill in the Blank: In the long run, firms earn __________ profit, accounting for opportunity costs but no economic profit.

normal profit.

What occurs during long-run competitive equilibrium?

Economic profit = 0, as firms enter or exit the market until only normal profits are earned.

What is the dominant firm model in oligopoly?

A dominant firm sets the price, and smaller firms supply the residual demand.

Describe the Cournot Model in oligopoly.

Firms decide output simultaneously, assuming the other’s output remains fixed.

What is Nash Equilibrium?

A set of strategies where each player’s strategy is the best response to the other’s strategy.

Fill in the Blank: A __________ is a scenario where rational players choose to defect, leading to suboptimal outcomes for both.

Prisoner’s Dilemma.

What are the three types of price discrimination?

First Degree, Second Degree, and Third Degree.

How do monopolies maximize profit?

They maximize profit where MR = MC but charge a price based on the demand curve.

What does the Lerner Index measure?

Pricing power as (P - MC) / P.

Fill in the Blank: A __________ arises due to higher prices and reduced output compared to perfect competition.

Inefficiency.

What are common sources of monopoly power?

Legal barriers, control of key resources, economies of scale.

Why do cartels fail?

Incentives to cheat and external competition.

Fill in the Blank: The __________ occurs when no player can improve their payoff by unilaterally changing their strategy.

Determination of Equilibrium.