Exam 3 Study Guide

Exam info: · Chapters 14, 15, 17 and 18 · 40 questions · 60 minutes given for completion · Worth 100 points · Opens on Thursday, May 13 at 7:00 AM and closes on Wednesday, May 19 at 11:59 PM Chapter 14 1. Definitions: game theory, cooperative equilibrium, noncooperative equilibrium, dominant strategy, weakly dominant strategy, Nash equilibrium, price leadership, prisoner’s dilemma, oligopoly industry, sequential game 2. Products in oligopoly markets: are they identical or differentiated? - Identical and differentiated - Could be verizon and at&t both using cell phone service which is identical - Cars are differentiated 3. Identify a firm’s dominant strategy - Russia vs US missile construction 4. Determine Nash equilibrium in a simultaneous game (payoff matrix) and a sequential game (decision tree) - Equilibrium outcome when each player applies their best strategy. - Sequential game: determine best responses given prior response from the other player. 5. Identify examples of industries that are oligopolies - Airlines - Search engines - Phone service 6. Understand relationship between P and ATC in an oligopoly industry - Oligopoly: P > ATC. 7. Know the concentration ratio that indicates an oligopoly setting - 4 firm, 40% concentration ratio. Chapter 15 8. Definitions: monopoly, network externality, antitrust laws 9. Identify ways that an industry will become a monopoly - a) Government may block entry (patents and copyrights) - b) Control of key resources. - c) Network externalities. - d) Economies of scale. 10. Know motivation behind the government’s granting of patents and copyrights - Encourage research and development.

11. Understand relationship between monopolist’s demand curve, market demand curve, and a monopolist’s marginal revenue curve - Monopolist’s demand curve = industry demand curve. - Marginal revenue curve lies beneath demand curve. - Slope is 2 times steeper. 12. Determine profit maximizing quantity of output, corresponding price and resultant profits for a monopoly from both a graph and table - MR = MC - Graph: intersection between MR and MC. - Q* = 10 - P* = $140 - Profit = TR - TC = (P - ATC) x Q - Profit = (140 - 70) x 10 - Profit = $700.00 13. Determine equilibrium in a graph if industry is perfectly competitive vs. equilibrium in a graph if industry is monopolized. Understand implications for economic surplus in one industry setting vs. the other. - Label equilibrium in a perfectly competitive industry. - Label equilibrium in monopoly industry. - Reduction in economic surplus 14. Identify government bodies charged with enforcing antitrust legislation - Federal trade commision (FTJ) - Department of Justice (DOJ) Chapter 17 15. Definitions: marginal revenue product of labor (MRPL), compensating differentials 16. Determine number of employees that should be hired given a wage: graph - Continue to hire until Wage = Marginal Revenue Product of Labor - W = MRP (intersection point) 17. Calculate MPL, MRPL, and determine optimal number of employees to be hired given a wage: table - L Q MPL MRP (P x MPL) 0 0 - - - 1 200 200 4,000 ✓ 2 380 180 3,600 ✓ 3 540 160 3,200 ✓

28. Calculate total tax burden and average tax rate 29. Understand implication of a decrease in the Gini coefficient in regards to income inequality 30. Determine if a Gini coefficient will have increased or decreased given a change in the Lorenz curve 31. Know how income inequality in the US compares with income inequality in the rest of the world