Econ 2

Profit Maximization Condition for Imperfectly Competitive Firms

Occurs where Marginal Revenue (MR) equals Marginal Cost (MC).

Profit Maximizing Price for Imperfectly Competitive Firms

Determined from the demand curve at the profit-maximizing quantity.

Deadweight Loss (DWL)

Loss of total surplus when output is not socially optimal.

Formula for Deadweight Loss (DWL)

DWL = 0.5 × (Q* - Qsoc) × (Psoc - P*).

Profit Maximization Condition for Perfectly Competitive Firms

Occurs where Price (P) equals Marginal Cost (MC).

Perfect Price Discrimination

Charging each consumer their reservation price, resulting in maximized total surplus and no consumer surplus.

Total Revenue (TR) Formula

TR = Price (P) × Quantity (Q).

Profit Formula

Profit = Total Revenue (TR) - Total Cost (TC).

Dominant Strategy in Game Theory

A strategy that provides the highest payoff regardless of the opponent’s choice.

Prisoner’s Dilemma

A situation in which both players choose to defect, leading to a worse outcome for both.

Social Marginal Cost (SMC) Calculation

SMC = Private Marginal Cost (PMC) + External Cost.

Equilibrium in Unregulated Market with Externality

Occurs where private marginal cost (PMC) equals private marginal benefit (PMB).

Positive Externality Condition

Occurs when Social Marginal Benefit (SMB) is greater than Private Marginal Benefit (PMB).

Negative Externality Description

Occurs when Social Marginal Cost (SMC) is greater than Private Marginal Cost (PMC).

Coase Theorem

States that if negotiation costs are low and property rights are clear, parties can efficiently negotiate outcomes.

Consumer Surplus (CS)

Area between the demand curve and the price paid by consumers.

Producer Surplus (PS)

Area between the price received by producers and the supply curve.

Key Condition for Socially Optimal Quantity

Occurs where Social Marginal Cost (SMC) equals Social Marginal Benefit (SMB).

Backward Induction in Game Theory

A method used to solve Sequential Games by anticipating opponents' responses.

DWL from Externalities Formula

DWL = 0.5 × (Qmkt - Qsoc) × (SMC - PMC).

Market Effects of Positive Externality

Results in underproduction, where Qmarket is less than Qsocial.

Market Effects of Negative Externality

Results in overproduction, where Qmarket is greater than Qsocial.

Negotiated Settlements Result

A mutually agreeable outcome that balances costs and benefits for both parties.

Surplus Effects from Perfect Price Discrimination

Consumer surplus is zero, while producer surplus is maximized.