Economics: Monopoly and Competition Concepts

Table 17-1: Water Market Monopoly

• A small town has two residents (Abby and Brad) who own water wells.
• They work together as a monopoly to decide how much water to pump and sell.
• Marginal cost is zero, so there is no cost to pumping more water.
• A demand schedule/total revenue schedule for water is provided.

Monopoly Pricing and Output

• Abby and Brad, working together as a profit-maximizing monopolist, would charge $6 for water.
• They would produce and sell 6 gallons of water, based on the table.

Perfect Competition

• If the market were perfectly competitive, the price for water would be $4.
• The quantity sold would be 8 gallons .

Antitrust Laws and Nash Equilibrium

• If antitrust laws prevent Abby and Brad from operating as a monopoly, the Nash equilibrium price would be $4.
• The profit for each would be $16.

Table 17-2: Prisoners' Dilemma

• Two firms (A and B) can choose to advertise or not advertise.
• Profits for each firm are shown in a table, based on their choices and their competing firm's choice.
• A dominant strategy exists where one firm's best choice remains the same no matter what the other firm chooses.

Output of this Game

• Firm A will choose to advertise, while firm B chooses not to advertise.
• The outcome of the game is for both firms to advertise.

Chapter 23: National Income

• GDP (Gross Domestic Product) measures the value of all final goods and services produced in a country.
• GDP includes the value of all goods and services using primarily market prices.

Owner-Occupied Homes

• Estimates of the values of unpaid housework and the rental value of owner-occupied homes are not included in GDP.

Housing Services

• $50,000 worth of milk and $5,000 in cartons/utilities. The dairy sold the cartons for $60,000 and the grocery store sold them to consumers for $65,000. How much is added to GDP?
• Answer = $65,000

U.S. GNP

• Accounts for foreign workers' production in the U.S. and U.S. citizens working in foreign countries.

Consumption

• Household purchases of services, nondurable goods, and durable goods (other than residential construction).

Chapter 24: Measuring the Cost of Living

• The CPI (Consumer Price Index) uses a selected basket of goods and services to calculate inflation.
• A base year is selected as a reference point from which inflation is subsequently calculated

Chapter 25: Production and Growth

• GDP per person in the U.S. in 2008 was approximately $47,000.
• The U.K. is an advanced economy and experienced lower economic growth than the U.S.
• Mexico is a middle-income country and experienced slower economic growth than the U.S.

Chapter 28: Unemployment

• The total labor force is calculated by adding up employed and unemployed people.
• The labor force participation rate is the proportion of the adult population that is in the labor force.
• Unemployment rate is equal to the total unemployed over the total workforce.

Chapter 29: The Monetary System

• The Federal Reserve governs the U.S. monetary system.
• An important function of the Fed is to control the money supply.
• Credit cards are not considered money in M1.

Chapter 30: Money Growth and Inflation

• Inflation measures with the Consumer Price Index (CPI).
• When the quantity of money increases the price level will also rise.

Explore the dynamics of monopoly pricing, perfect competition, and the implications of antitrust laws through a small town water market scenario. This quiz also covers the Prisoners' Dilemma in strategic decision-making between firms. Test your understanding of these fundamental economic concepts!