Card Set Information
in perfect competition... marginal revenue must equal
When you are in perfect competition....
marginal revenue will be parallel to the x access
If a demand function is P=4-2Q what is the marginal revenue?
TC = 5+2Q+Q^2
How do you get MC?
MC = change in TC/changeQ = 2+2Q
In the perfect competition market, there is no
dead weight loss
In a monopoly, there is usually...
a dead weight loss if everyone is charged the same price. becuase price is high, quantity is low, and the demand curve is to the right of MR.
The lerner index
measures a firms market power: the larger the difference between price and marginal cost, the larger the learner index.
What are the sources of market power?
Availability of substitutes
number of firms
proximity of competitors determine market power
What are some causes of monopoly?
- one firm can produce the total output of the market at a lower cost than two or more firms could mainly due to high fixed costs
Government creation of monopoly
- governments grant a license, monopoly of rights, or patents.
Why price discrimination?
For monopolists, price discrimination increases profit above the uniform pricing level through two channels:
Filling in the dead weight loss
higher prices for some:
- price discrimination can extract additional consumer surplus from consumers who place a high value on the good.
2. Channel 2: attract new customers
- offering a lower price to some
Price discrimination conditions
The firm must have market power
- A monopoly, or oligopoly or monopoistically competitive firm (i.e. Apple), might be able to price discriminate
A Firm might identify groups with different price sensitivity
- if consumers have different demands, a firm must identify how they differ.
A firm must prevent resale
- if resale is easy, price discrimination doesn't work because of only low price sales.
What are types of price discrimination?
1. Perfect Price Discrimination (firm has the most knoweldge about the person; price differs across consumers and may differ too for a given customer)
2. Group price discrimination - the firm charges each group of customers at a different price, but it does not change prices within the group (i.e. seniors vs students)
3. Nonlinear price discrimination - the firm charges a different price for large purchases than for small quantities so that the price paid varies according to the quantity purchased.
MR = ?
Profit is higher with.... price discrimination or uniform pricing?
price discrimination because can charge different rates; fill in dead weight loss
When you can't price discriminate... you need to
aggregate demand functions so you have only one; then determine MR/MC.
Country 1: MR in country 1 =
Country 2: MR in country 2 =
both are equal to the same MC.
The strategic game might be repeated; a finite and pre-specified number of times indefinetly
An action is...
a single move that a player makes at a specified time, such as choosing an output level or price
Once a cheater, always a cheater.
"We have an agreement, if in one game I see you cheat... I will punish you/change strategies"
Assessing risk you need to...
1. identify the probability associated with each of the outcomes
2. from the probability, establish the expected earning with each of the outcomes
3. calculate the variance/a measure of risk
Assessing risk/probability criteria
must be mutually exclusive (one or the other) and exhaustive (add to 1)
Expected value =
Probability1*outcome1 + probability 2*outcome2.... +ProbabilityN*outcomeN