Econ 2

Profit Maximization for Imperfectly Competitive Firms:

Quantity: Where MR = MC (Marginal Revenue = Marginal Cost)

Price: From the demand curve at the profit-maximizing quantity

Formula: MR = MC

Loss to Consumers, Gains to Producers, and DWL (Deadweight Loss):

Consumer Surplus: Area between demand curve and price paid

Producer Surplus: Area between price received and supply curve

DWL: Loss of total surplus when output is not socially optimal

DWL Formula: 0.5 × (Q* - Qsoc) × (Psoc - P*)

Profit Maximization for Perfectly Competitive Firms:

Quantity: Where P = MC

Price: Market-determined equilibrium price

Formula: P = MC

Perfect Price Discrimination:

Quantity: Where demand = marginal cost

Price: Varies, charging each consumer their reservation price

Total Surplus: Maximized, no DWL

Consumer Surplus: 0

Producer Surplus: Entire surplus

Revenue and Profit Calculation:

Total Revenue (TR): P × Q

Total Cost (TC): Fixed Costs + Variable Costs

Profit: TR - TC

Game Theory (Chapter 9): 6. Dominant Strategy:

Strategy that always provides the highest payoff, regardless of the opponent’s choice

Prisoner’s Dilemma:

Both players have an incentive to defect, leading to a worse collective outcome

Sequential Games:

Backward induction to determine the equilibrium

Externalities (Chapter 11): 9. Unregulated Market Equilibrium with Externality:

Quantity: Where private marginal cost (PMC) = private marginal benefit (PMB)

Social Marginal Cost (SMC):

SMC = PMC + External Cost

Socially Optimal Quantity:

Where social marginal cost = social marginal benefit

Deadweight Loss with Externality:

DWL Formula: 0.5 × (Qmkt - Qsoc) × (SMC - PMC)

Comparison of Social and Private Costs/Benefits:

Positive Externality: SMB > PMB

Negative Externality: SMC > PMC

Negotiated Settlements:

Coase Theorem: If negotiation costs are low and property rights are clear, parties can reach efficient outcomes

Costs/Benefits of Eliminating an Externality:

Balancing external costs with the benefits of production

Imperfectly Competitive Firms:

Profit Maximizing Quantity: Where MR = MC (Marginal Revenue = Marginal Cost)

Profit Maximizing Price: Price on demand curve at the profit-maximizing quantity

Consumer Loss/Producer Gain/DWL:

Consumer Surplus (CS) decreases

Producer Surplus (PS) increases

Deadweight Loss (DWL) exists due to underproduction

Formulas:

MR = ΔTR / ΔQ

MC = ΔTC / ΔQ

Profit = TR - TC

TR = P * Q

Perfectly Competitive Firms: 5. Profit Maximizing Quantity: Where P = MC 6. Profit Maximizing Price: Market price (P), as firms are price takers 7. No Deadweight Loss: Efficient output where supply equals demand

Perfect Price Discrimination: 8. Profit Maximizing Quantity: Produce where D = MC 9. Price Charged: Each consumer’s willingness to pay 10. Surplus Effects: - Consumer Surplus = 0 - Producer Surplus maximized - Total Surplus maximized, no DWL

Market Outcomes & Surplus: 11. Consumer Surplus: Area between demand curve and price line 12. Producer Surplus: Area between price line and supply (MC) curve 13. Deadweight Loss: Loss of total surplus due to under- or over-production - DWL = 0.5 * (Q* - Qm) * (Pm - MC)

Game Theory (Chapter 9): 14. Dominant Strategy: Best action regardless of other player’s choice 15. Prisoner’s Dilemma: Both players have a dominant strategy leading to a worse collective outcome 16. Sequential Games: Solve using backward induction; anticipate opponent’s response

Externalities (Chapter 11): 17. Unregulated Equilibrium Quantity: Where private marginal benefit (PMB) = private marginal cost (PMC) 18. Social Marginal Cost (SMC): SMC = PMC + External Cost 19. Socially Optimal Quantity: Where social marginal benefit (SMB) = SMC 20. DWL from Externalities: DWL = 0.5 * (Qmarket - Qsocial) * (SMC - PMC) 21. Market Effects: - Negative Externality: Overproduction, Qmarket > Qsocial - Positive Externality: Underproduction, Qmarket < Qsocial

Negotiation & Externalities: 22. Coase Theorem: If transaction costs are low and property rights are clear, parties can negotiate to reach an efficient outcome 23. Mutually Agreeable Outcome: Balances costs and benefits for both parties 24. Socially Optimal Outcome: Maximizes total surplus considering external costs/benefits