G202 Exam 2 Content

Dominant Strategy

player makes the same choice in all scenarios

Secure strategy

Extreme risk aversion to avoid the worst payoff

Nash Equilibrium

set of strategies where neither player has regreats with their chosen strategy, holding constant their rival’s choice

Profit Maximization

found where MR=MC

Social Efficiency

Found where D=MC

Inefficiency

When firms with market power under produce relative to the socially efficient output (Qf<Qe), society loses out on a net benefit

strategic sustainability

when firms voluntarily incorporate sustainable business ventures in an effort to increase profits

Carbon Offsets (or voluntary emission reductions)

involve reducing, avoiding, destroying, or sequestering the equivalent of a ton of GHG in one place to “offset” an emission taking place somewhere else

Carbon Permits (or cap-and-trade)

involve government restricting the overall amount of a GHG by limiting the number of permits issues and then allowing those permits to be traded in the open market

Tradable pollution permits

government issues pollution permits that pertain to a permissible level of pollution and then government lets the firms trade the permits as desired

Market power

exists when firms are able to restrict competition to sustain prices above marginal cost

Market Strategies to restrict competition

Guarding trade secrets

control of an essential resource

exclusive contracts and customer lock-in

Collusion

Non-market strategies to restrict competition

Government licensing

patent or copyright protection

trade regulations

government or NGO certification

Optimal Sales Target (Qf)

Marginal revenue = Marginal cost

Optimal Price

Markup over cost where the markup factor depends on demand. More inelastic demand results in a higher mark up over costs

Inelasticity

Closer to zero, supports a higher price

Elasticity

Closer to -oo, needs a lower price

Imperfect price discrimination

Groups of consumers are charged different prices, based on their different willingness to pay (elasticity)

Consumer surplus decreased, but not to 0

Perfect price discrimination

each consumer is charged a price equal to her willingness to pay

No social inefficiency occurs but all market surplus goes to the producer (CS=0)

Profits are increased relative to imperfect price discrimination