Economics Final Exam Overview PDF

Final Exam Overview Reviewed Overview of different market types Perfect Competition Many buyers/many sellers. Non-differentiated good. No barriers to entry. Price taker Monopoly...

Final Exam Overview Reviewed Overview of different market types Perfect Competition Many buyers/many sellers. Non-differentiated good. No barriers to entry. Price taker Monopoly One seller/many buyers. Barriers to entry (natural, legal ownership). Price setter. Monopolistic competition Many buyers/many sellers. Differentiated good. No barriers to entry. Firms compete on product quality, price, and marketing Oligopoly Few sellers/many buyers. Barriers to entry. Incentive to collude/form a cartel Firms in different market types Perfect Competition MR = MC but must take the price from the market. MR = Market Price (MP) so MP=MC maximizes welfare Final Exam Overview 1  Monopoly wants to sell the quantity that maximizes profit. Finds that Q (MR = MC) and sells at that price (from demand curve). Monopolistic competition Same as in monopoly and we call the difference between the MC and P as the “markup” Oligopoly Same as monopoly, can set prices independently or collude Price and Output in Monopolistic Competition Final Exam Overview 2  Price and Output in Perfect Competition Cost relationships (key formulas) TC = TVC + TFC → ATC = AVC + AFC TC/Q = ATC → TC = ATC * Q TVC/Q = AVC → TVC = AVC * Q TFC/Q = AFC → TFC = AFC * Q Questions from the class Final Exam Overview 3  (Ch. 14) excess capacity - how much would you produce at your lowest cost vs what you’re actually producing (how many extra units you can produce) long-run equilibrium: profit equals zero Final Exam Overview 4  Technological Efficiency (review this) Consumer and producer surplus Final Exam Overview 5 Final Exam Overview 6 Final Exam Overview 7 Final Exam Overview 8 Final Exam Overview 9  Exam 2 Review I = $20 PD = $4 PC = $2 Pc * Qc + Pd * Qd = I 2Qc + 4Qd = 20 2Qc = 20 - 4Qd Qc= 10-2Qd (slope of budget line) RId = 20/4 = 5 Final Exam Overview 10  Utility Maximizing Choice Final Exam Overview 11  Price discrimination Price discrimination is when a monopolist charges the different prices to different people for the same good They can do this because they are the only provider of the good (a) and they can segment the market into multiple groups (b) Price discrimination gets us closer to the welfare from perfect competition, perfect price discrimination gets us to the same welfare point Tips Practice elasticity questions review short answer questions Homework Review HW #1 Self-interest - personal choices that people take that benefit themselves Social interest - in favor of everyone opportunity cost - what has to be given up marginal benefit - benefit gained from consuming an additional unit of good/service, calculated by difference in total benefit when one more unit is received marginal cost - opportunity cost of producing one more unit of a good/service, calculated as difference in cost for producing an additional unit Demand is influenced by substitutions, income, preferences, population, expected future prices, and complements Supply is influenced by factors of production, prices of related goods produced, expected future prices, number of suppliers, technology, state of nature Demand and supply equations: 80 - 5Q* = 20+55Q* Final Exam Overview 12  60-5Q* = 55Q* 60 = 60Q* 1 = Q* Plug into either demand or supply equation to find equilibrium quantity HW #2 Elastic good - choice, not really a necessity, many substitutes Inelastic good - not much substitutes, in extreme demand Inelastic if between 0 and 1 Elastic if greater than 1 elastic Change in Q/Qavg * 100 / Change in P/Pavg * 100 THEN divide quantity quotient by price quotient Cross-price elasticity of demand: positive value means substitutes negative value means complements Change in Q/Qavg * 100 / Change in P/Pavg * 100 Income elastic If income elasticity of demand is greater than 1, it is an income elastic normal good negative income elasticity of demand is an inelastic inferior good Change in Q/Qavg * 100 / Final Exam Overview 13  Change in I/Iavg * 100 Graphing consumer and producer surplus: 1. Find equilibrium point 2. graph it with quantity demanded on x axis, price on y-axis 3. Find the area above the equilibrium point (consumer surplus) 4. Find the area below the equilibrium point (producer surplus) 5. Total surplus = CS + PS Plot deadweight loss by finding quantity demanded, inputting price on graph, and making a line from quantity demanded to find points it connects, find the area of deadweight loss Binding rent ceiling is under equilibrium point HW #3 Marginal utility - change in total utility that results from a unit-increase in quantity of a good consumed Utility maximizing choice - choice of consumption that maximizes total utility as they’d want the best bundle they can get given their resources Utility maximizing choice - highest total utility summation from both goods Calculating utility maximizing choice given total utility using marginal utility: change in total utility from one quantity to another - marginal utility Marginal utility per dollar = marginal utility divided by price of good SO, if marginal utility is provided, can apply marginal utility per dollar OTHERWISE, if it’s total utility, have to calculate marginal utility then marginal utility per dollar Tangency: The point where an indifference curve is tangent to the budget constraint, indicating the optimal consumption bundle for a given budget. Marginal Rate of Substitution (MRS): The rate at which a consumer is willing to exchange one good for another while keeping utility constant Final Exam Overview 14  Preference Map: A graphical representation of a consumer's preferences, shown through multiple indifference curves, where each curve represents combinations of goods providing the same utility level Budget equation line = P x Q + P x Q = I real income: income/price of good HW #4 Substitution effect - consumers substitute a good for comparable goods, downward slope of demand curve Income effect - consumers purchasing power increases, price of a good falls, consumers buy more of all goods for normal goods, income effect complements substitution effect Public choices - results in overprovisioning of public goods non rivalrous and non-excludable Marginal social benefit = Marginal Social Cost is the efficient number of good Four externalities: Negative production externality (factories) Positive Production Externality (Beekeeping) Negative Consumption Externality (Smoking cigarettes) Positive Consumption Externality (Vaccination) HW #5 Perfect competition - many firms and many buyers (world markets) Monopolistic competition - many firms that produce similar but slightly different products (restaurants) Oligopoly - few firms dominate the market, produces nearly identical or different products (automobile industries) Final Exam Overview 15  Monopoly - one firm is the producer (water utility, garbage truck) Technologically efficient - fewest inputs to produce the desired output Economically efficient - cheapest option given hourly rates/rental rates Short-run costs: fixed inputs Long-run costs: variable costs Total Cost (TC) = TFC + TVC TFC - constant TVC = TC - TFC MC = Change in TVC/Change in Q ATC = TC/Q AFC = TFC/Q AVC = TVC/Q TVC = Prior TVC + MC Four key conditions for a market to exist in perfect competition: many firms and buyers identical products no barriers to entry and exit well-informed firms and buyers Profit-maximizing output - MC ≤ P Calculate marginal cost compare to price choose ones with highest output but lower than price (MC) HW #6 Perfect Price Discrimination by a Monopolist Final Exam Overview 16  Definition: Perfect price discrimination occurs when a monopolist charges each consumer the maximum price they are willing to pay, capturing all consumer surplus. Welfare Outcomes: Generates efficient outcomes similar to perfect competition but redistributes surplus entirely to the monopolist. Group Preferences: Monopolist: Prefers perfect price discrimination as it maximizes profit by capturing all consumer surplus. Consumers: Likely to prefer perfect competition due to retained consumer surplus and lower prices. Government: Preference depends on policy goals (efficiency or equity); may not prefer discrimination if equity is prioritized. Monopoly Analysis: Hot Air Balloon Rides 1. Marginal Revenue: Formula: , where. MR = Change in TR/Change in Q where TR = P * Q Calculate for the third ride. 2. Profit Maximization: Determine Quantity: Use to find profit-maximizing output. MR = MC Economic Profit: Calculate total revenue (TR) and total cost (TC) then Profit = TR - TC Monopolistic Competition 1. Excess Capacity: Definition: Firms produce less than the quantity that minimizes average cost, leading to inefficiency. Final Exam Overview 17  Comparison: In perfect competition, firms produce at minimum average cost. 2. Markup: Definition: Difference between price and marginal cost, representing a firm's pricing power. Difference from Perfect Competition: No markup in perfect competition; price equals marginal cost. Profit Maximization in Monopolistic Competition (Life- Coaching Service Example) 1. Given Data: Demand and Costs: Analyze the demand schedule and cost structure. Profit Maximization: Find quantity where , then determine corresponding price from the demand curve. MR = MC Economic Profit: Calculate using. Profit=TR−TC Oligopoly and Collusion 1. Impact on Consumers: Effect: Collusion leads to higher prices, reduced output, and loss of consumer surplus. 2. Government Tolerance: Reason: International collusion (e.g., OPEC) might be tolerated for geopolitical reasons or lack of jurisdiction. Domestic Policy: Strict antitrust enforcement typically discourages collusion to protect consumer welfare. Final Exam Overview 18  Midterm Exams Review Midterm #1 For comparative advantage, result with less opportunity cost is correct Total change in quantity of good sold and change in price for good between old equilibrium and new equilibrium calculate both equations, find difference in quantity, and input quantity variable in equations to find difference in price Midterm #2 A political equilibrium occurs when the choices of all participants and cannot be improved upon Non-excludable and rivalrous (Fishing) Non-excludable and Nonrivalrous (national defense) Excludable and Rivalrous (Food/Drink) Excludable and Nonrivalrous (Cable/Internet) free-rider problem: public is allowed access without needing to pay, resulting in taxes Budget Line = PxQx + PyQy = I Real income = Income/Price of Good Efficient Number: MSC = MSB Final Exam Overview 19