Econ 2610, Principles 1        Review Sheet #3        Dr. Usip

Study Guide for Chs. 8, 9, 10 & 11          

 

Chapter 8: Perfect Competition

  1. What is a market structure? What are the types? How is an industry different from a market?
  2. Know the characteristics of a competitive market structure.
  3. What are the constraints that each competitive firm faces when deciding the profit-maximizing output to produce?
  4. How does the demand curve faced by competitive firm differ from the market demand curve?  Is elastic, inelastic or perfectly elastic?  Explain why.
  5. What does it mean to say that a firm is a price taker? 
  6. Be able to define and compute total revenue (TR), marginal revenue (MR) and average revenue (AR). Why are both MR and AR equal to the price that a firm receives for selling a unit of the output?
  7. What are the rules for choosing the profit-maximizing level of output?  Be able to explain why a firm should produce more output if MR >MC, or produce less output if MR < MC.
  8. Be able to show graphically the MR, MC, ATC, and demand curves for an individual firm; use such a graph to identify the profit-maximizing level of output and use the graph to determine the area representing the firm's economic profits (EP) - positive, normal/zero or negative.
  9. What is profit per unit (PPU)? Know how to use it to determine numerically the amount of positive EP, Normal/zero EP, or negative EP.
  10. What is the shutdown rule?  Be able to explain it using PE in relation to TVC and AVC.
  11. Be able to explain why the SR supply curve of a competitive firm is indeed the the MC curve above the minimum point on the AVC curve.
  12. Be able to explain why firms in a completive industry/market earn zero/normal EP in the LR; describe the adjustment process that ensures this to be the case. For instance, if firms are making economic profits, what will happen to the number of firms in the industry in the LR?  What will happen to the location of the market supply curve?  What will happen to the equilibrium price?  What will happen to the profits of firms in the industry in the LR? Answer the same questions assuming that the firms in the industry were earning losses.
  13. Why do we believe that in the LR a competitive firm will use the optimal production capacity (plant/store size) which corresponds to the minimum point on both the short-run ATC (SRATC) curve and the long-run ATC (LRATC) curve? What is the LR equilibrium condition for the competitive firm?
  14. Why are competitive markets the standard/benchmark by which all other market structures are evaluated?
  15. Explain the conditions/reasons why, in competitive markets, the LR industry supply curve can be upward-sloping, perfectly horizontal/elastic, or downward-sloping.

Chapter 9: Monopoly

  1. What are the key characteristics of a monopoly firm? Does a monopoly firm face the demand constraint? Does it face the costs constraint?
  2. Know the sources of monopoly market power: Be able to define the terms natural monopoly, patent, copyright, and government franchise. How is public monopoly different from private monopoly?
  3. Monopoly pricing and output decisions: Be able to explain the rule that the monopolist uses to choose the profit-maximizing level of output (Q*) and price (P*).
  4. Know how to compute monopoly profits numerically and also how to show such profits graphically by drawing a graph that shows the demand, MR, MC, and ATC curves.
  5. What is the shutdown rule for a monopoly firm in the short run? Is it the same as the shutdown rule for a competitive firm?  Would you expect a monopolist to earn losses in the long run?  Explain.
  6. Comparing monopoly with pure competition: Would the economy be better off or worse off with monopoly than with competitive firms? Explain.
  7. In what ways does a monopolist impose a welfare loss on society?  Do excessive economic profits of the monopolist impose a welfare loss on the society?  Be able to defend your responses. Also, know how to use the deadweight loss to measure economic loss/inefficiency from monopoly.
  8. What is a rent-seeking activity?  Can government regulation of rent-seeking activity result in monopoly earning normal profits?
  9. What is price discrimination?  What requirements must be met for price discrimination to occur? 
  10. What are the types of price price discrimination? Be able to explain each type.
  11. What is perfect price discrimination? How is it different from 2nd and 3rd degree price discrimination?
  12. What is the main reason for regulating a natural monopolist? What pricing strategies/rules does the government use?

Chapter 10: Monopolistic Competition

  1. What are the three basic characteristics of a monopolistic competition market structure?
  2. Explain the term market power: Be able to describe product differentiation and its impact on a firm's demand curve.
  3. Describe how a firm in this market structure makes pricing and output decisions: Be able to show graphically how the firm uses the MR = MC rule to set the profit maximizing quantity (q*) and price (p*).
  4. Be able to determine economic profit or loss graphically and numerically using the area of a rectangle.
  5. Will firms in a monopolistically competitive market earn positive economic profit (EP) in the long run? Be able to explain the adjustment process when the short-run EP is positive or negative.
  6. Be able to explain why non-price tools are commonly used by firms in this market: How does advertising change the firm's demand and ATC curves?
  7. Be able to assess the efficiency of monopolistic competition by comparing it to perfect competition - using producer surplus, consumer and DWL.

Chapter 10: Oligopoly & Game Theory

  1. Know the characteristics of oligopoly markets.
  2. Why is entry into this market prohibitively difficult?  
  3. Be able to explain the sources of oligopoly market power.
  4. Know why ‘mutual interdependence’ causes a 'kink' in the demand facing each firm which makes it difficult to use the MR=MC rule to determine p* and q*.
  5. What is game theory the alternative approach to understanding the profit maximizing behavior of firms in this market?  What is a payoff matrix?  What is a dominant strategy?  
  6. Know the market characteristics that determine whether a game is simple or complex.
  7. Be able set up the payoff matrix in a 2-person game by identifying the basic elements of the game.
  8. Be able the solve a 2-person game problem for a Nash equilibrium by identifying the dominant strategy each player.
  9. Be able to define the following terms: cartel, explicit collusion, tacit collusion, and tit for tat.
  10. Why are cartels generally unstable?


Chapter 11: The Labor Market

 1. Know the significance of the circular flow diagram in real terms (outer arrows) and in monetary
    terms (inner arrows).
2. Be able to explain why the resource markets are essential for understanding the goal-oriented
    behavior of the households (consumers) and firms in the economy.
3. Know the characteristics of a competitive labor market.
 4. Be able to explain why a person's supply of labor is 'backward bending'.
5. Know the tradeoff between income and leisure: What is the substitution effect? What id the income effect?
6. Be able to explain why the market labor supply curve is upward-sloping and more elastic in the LR than in the SR.
7. Know the non-wage factors that can shift the labor supply curve in the SR.
8. Know why a firm’s demand for labor is a derived demand.
9. Know the constraints that face a firm when labor is the only variable input/factor of production.
10. Be able to explain why a firm’s demand for a labor is the declining portion of the value of marginal product of labor(VMPL).
11. Be able to explain why the market demand for labor is the sum of individual firm’s demands.
12. Know the factors that determine the elasticity of demand for labor and how a change in any of them affects (shifts) the labor demand for labor.
13. Be able to explain how equilibrium is determined in a competitive labor market.
14. Know how the labor market adjusts to a new equilibrium when there is a change from (a) the
      demand side, and (b) supply side of the market.
15. Be able to explain how an imperfect labor market is different from a competitive labor market?
16. Know how a monopolist in a competitive labor determines the amount of workers to hire and the wage rate to them.
17. 16. What is monopsony? Know how a monopsonist in a competitive labor determines the amount of workers to hire and the wage rate to them.
18. What is monopolistic exploitation? What is monopsonistic exploitation?
19. Be able to discuss minimum wage issues: what are the goals minimum wage laws?  What is the theoretical explanation of the minimum wage laws? Does the available empirical evidence support or invalidate the minimum wage laws?

 

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