ECO 3101 Final Exam Questions and Complete Solutions Graded A+

ECO 3101 Final Exam Questions and Complete Solutions Graded A+ law of diminishing returns - Answer: states that if other inputs are fixed, the increase in output from an increase in the variable input must eventually decline marginal product - Answer: the change in total product due to a unit change in the variable output average product - Answer: total output divided by the quantity marginal rate of technical substitution - Answer: -rate at which one input can be substituted for another without altering total output -the slope of the isoquant DRS - Answer: -a proportional increase in inputs yields less than proportional output -uncommon -occurs with diseconomies of scale -LAC rises with increased input CRS - Answer: a proportional increase in inputs yields equally proportional output IRS - Answer: -a proportional increase in inputs yields more than proportional output -economies of scale -provides incentive for growth -LAC declines with output - Answer: short run cost formula? ATC curves are inside (or above) the LAC envelope, touching at one place - Answer: Why do we (the book) say that the LAC curve is an "envelope" of all the short-run ATC curves? 1-standard product 2-price takers 3-free entry 4-perfect information - Answer: characteristics of perfect competition 1-control over key inputs 2-economies of scale 3-patents 4-network economies 5-government licenses - Answer: conditions of monopolies - Answer: short run profit maximization for monopolies shutdown condition - Answer: when your price is not high enough to cover your variable costs pecuniary diseconomy - Answer: -a bidding up of input prices when industry output increases -as Q rises, LAC rises - Answer: long run profit maximization for monopolists - Answer: how do you find MR for a monopolist? The less elastic demand is with repsect to price, the more price will exceed marginal revenue - Answer: relationship between MR and elasticity? 1st price discrimination - Answer: -aka perfect price discrimination -walking into a store and paying exactly the highest amount that you would be will and able to pay for it 2nd price discrimination - Answer: -different price/quantity bundles -benefits consumers who purchase in bulk 3rd price discrimination - Answer: -segregating markets into groups, and charging different prices to each efficiency loss of a monopoly - Answer: 1-state ownership 2-state regulation 3-exclusive contracting 4-anti-trust laws 5-laissez faire - Answer: what public policies can be implemented to address monopolies? - Answer: how are price and elasticity related to marginal revenue? - Answer: how can taxes distort revenues? Bertrand oligopoly model - Answer: oligopoly model in which each firm assumes that rivals will continue charging their current prices predicted Nash equilibrium outcome for Bertrand oligopoly - Answer: Cournot oligopoly model - Answer: oligopoly model in which each firm assumes that rivals will continue producing their current output levels predicted Nash equilibrium outcome for Cournot oligopoly - Answer: Stackelberg oligopoly model - Answer: predicted Nash equilibrium outcome for Stackelberg oligopoly - Answer: - Answer: how can punishment strategies in a repeated game can foster collusion in a Bertrand model? minimum efficient scale - Answer: -the level of Q that minimizes costs to the firm -where LMC=LAC Q(price-total costs) - Answer: economic profit formula MR=MC - Answer: profit maximizing condition because they are considered sunk costs in the SR - Answer: why are fixed costs ignored in the SR? shutting down - Answer: when a firm stop producing exiting the market - Answer: when a firm sells all capital and stops producing indefinitely Walrasian equilibrium - Answer: when Qs=Qd At the minimum of the LAC curve - Answer: when will firms stop entering a competitive market? economic surplus - Answer: producer+ consumer surplus -possibility for economic profits and losses -price is "chosen" at Qd=Qs - Answer: short run competitive equilibrium -firms make zero economic profit -possibility for entry and exit of the market diminishes possibility for long term profits -in the LR, firms are trying to make their hypothetical and real costs touch - Answer: long run competitive equilibrium should be the same because as a firm you are constantly optimizing - Answer: relationship of SRAC and LRAC in the long run? Q*=P=minLAC - Answer: condition at minimum efficient scale in a perfectly competitive industry economies of scale - Answer: -property by which the firm's avg. cost decreases as output increases Nash equilibrium - Answer: -a profile of strategies such that each players strategy maximizes his/her profit given the other players' strategies -no player can benefit from changing their strategy a straight line - Answer: the shape of an isoquant if K and L are perfect subtitutes? L-shaped - Answer: the shape of an isoquant if K and L are perfect complements? average product (geometric definition) - Answer: the slope of the line going the origin to the specified point on the total product curve isoquant maps - Answer: -can illustrate diminishing returns to production without having numerical values attached -can illustrate economies of scale if values are attached -would be illogical if an isoquant had a positive slope Marginal Cost (geometric interpretation) - Answer: -equals the slope of the variable cost curve at that level of output -equals the slope of the total cost curve at that level of output natural monopolies - Answer: characterized by declining long-run average costs production function - Answer: the relationship by which inputs are combined to produce output isoquant - Answer: the set of all input combinations tha yeild a given level of output isocost line - Answer: a set of input bundles each of which costs the same amount output expansion path - Answer: the locus of tangencies (minimum cost input combinations) traced out by an isocost line of given slope as it shifts outward into the isoquant map for a production process 1-the price must equal marginal cost ona rising portion of the marginal cost curve 2-that price must exceed the minumum value of the average variable cost curve - Answer: what are the two rules for the shutdown condition? marginal revenue - Answer: is the slope of the total revenue curve dominant strategy - Answer: the strategy in a game that produces better results irrespective of the strategy chosen by one's opponent long-run equilibrium for a single-price monopolist - Answer: output is at the level where short-run and long-run marginal cost are the same by producing where demand is price elastic - Answer: how will a single-price monopolist with a positive marginal cost maximize its profits? Diminishing returns is that marginal product reduces when one factor increases while the others are fixed and is the empirical regularity. DRS means that the increase in output is less than proportional to the increase in all inputs. - Answer: Explain the difference between diminishing returns and decreasing returns to scale. Which one is an empirical regularity (meaning it is true in real life for almost all firms)? ATC because it is above AVC and MC is rising - Answer: A firm has positive fixed costs, and a rising MC curve. Which level of output is higher: the level where MC crosses AVC or the level where MC crosses ATC? Explain graphically or logically. All potential gains from trade are realized (there is no deadweight loss), consumers get item if they value it more than P =MC - Answer: Why do perfectly competitive industries result in allocative efficiency? Not advertising is like cooperation, both firms are better off if neither advertises, but each has an individual incentive to advertise to steal customers from the other. - Answer: How is the decision of two firms whether or not to advertise like a prisoner's dilemma? 1- Perfect competition and Bertrand 2-Stackelberg 3-Cournot 4-Monopoly - Answer: Rank the following outcomes in terms of efficiency: monopoly, Bertrand duopoly, Cournot duopoly, Stackelberg duopoly, perfect competition. Why is there this difference? They can do better by agreeing on a high price. They can threaten each other that if anyone ever tries to undercut the price, they will be punished with a price war in the future (In other words, they can resort to the Nash equilibrium price). It becomes an equilibrium to collude. - Answer: The Nash equilibrium of a one-shot Bertrand duopoly is to set price equal to marginal cost. Explain how firms can do better in equilibrium if the game they are playing is repeated.