EC202_Exam2SG_S2012 - Susanto-CMU

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EC202 – Microeconomics, Spring 2012 Study Guide for Exam 2

Chapter 8 Explicit costs vs. implicit costs Relationship between total product and marginal product Know and be able to define the four cost structures: AFC, AVC, ATC, MC Relationship between MC and ATC, MC and AVC Relationship between AFC and the other cost structures (e.g., what happens to them if AFC increases) Relationship between AVC and the other cost structures (e.g., what happens to them if AVC increases) Calculate average total cost and profit per unit Be able to point out examples of variable cost, fixed cost. Differentiate between the short-term and long-term for firms (i.e., what is fixed and variable in each term) Long run cost structures: economies of scale, constant economies of scale, diseconomies of scale Chapter 9 MR = MC rule, know what it is and under which market(s) it applies Characteristics of a purely competitive market (e.g., significance of a single player, types of products) Competitive firms as price takers Find profit maximizing quantity and profits for a competitive firm (use either “total revenue-total cost” or “marginal revenue-marginal cost” approaches) Know about shutdown point, break-even point, and the ranges for which firms can profit and suffer losses Purely competitive markets and firms in the long run: can they make economic profits? Equilibrium and various efficiencies attained by purely competitive markets in the long run Long run freedom of entry/exit: what are the implications for competitive firms and economic profits? Chapter 10 The MR = MC rule for monopolistic firms: does it apply? A monopolist as a price maker Outcome of a monopolistic market, compared to what it would have been if it were a competitive market The case for natural and government-created (granted) monopoly Economic profits for a monopolist: can it persist in the long run and why Calculate profit for a monopolist Understand the graph of a monopolistic firm: o Be able to pinpoint the profit maximizing price and quantity o Know how to get total profit (i.e., the area of a rectangle: Profit = (Price-ATC) x Quantity) Price discrimination: what is the rationale and what are the bases Demand elasticity and price discrimination Chapter 11 Differentiate a monopolistically competitive market from a pure competition and pure monopoly Characteristics of monopolistically competitive markets Outcomes of monopolistically competitive markets: efficiency or inefficiency? Why? Can monopolistically competitive firms and/or oligopolistic firms make profits in the long run? How? Characteristics of an oligopoly Relationship between oligopolistic markets with game theory, collaborative actions, and collusion/cartel Basic understanding of the Herfindahl index: what it means when the index is high, when it is low?

Chapters 9, 10 & 11 (Comparative Questions & All About Monopoly Power) What is monopoly power? Is it absolute? Sources of monopoly power Monopoly power and its sustainability in the long run: is it possible? Monopoly and inefficiencies: what does lack of competition do to the monopoly firm, the industry in which it operates, its customers, and the society? How does a monopolistically competitive market differ from a purely competitive market? The monopolistically competitive market’s differentiated product offerings and the need for marketing/advertising The different goals of advertising for the monopolistically competitive firms and oligopolies: think that in an oligopolistic market, the market is more concentrated and saturated (e.g., cell phone providers) Chapter 16 Public goods: define and differentiate from private goods o The problem of determining the demand for public goods o Problems associated with public goods o Why does the government sometimes has to provide public goods o Principle used to determine if and how much to provide o Potential solutions for problems related to public goods: all about providing the right incentives Types of market failures Externalities: be able to define and know examples o Negative externalities vs. positive externalities o How can problems of externalities be solved/alleviated o Private-party solutions to externalities: requirements and limitations o How can the government help solve externalities Failure to account for externalities in the cost of production by private firms and individuals o Why that happens (think of Chris Jordan’s TED Talk) o What are the consequences of failing to take externalities into account o What does planned obsolescence have to do with externalities Asymmetry of information: why is it detrimental to efficient market transaction Consequences of information asymmetry Two types of information asymmetry that involve buyers withholding information from the seller: o Adverse selection: be able to define and know examples o Moral hazard: be able to define and know examples o How can they be mitigated Chapter 17 Government as a monopoly Inefficiencies related to operating a government: special interest, rent seeking behavior, etc. Inefficiencies and deadweight loss: what is it, why does it occur? Know the two principles of taxation: benefits received and ability to pay Three types of tax structure: proportional, progressive, and regressive (be able to provide examples) The rule about sharing the burden of tax (depends on elasticity of demand in relations to supply) General rule for charging excise tax: more to buyers or sellers (again, depends on elasticity) Excise tax and the deadweight loss Lecture on Financial Crisis    Factors that lead to worsening conditions in financial markets: moral hazard, externalities, and uncertainty. U.S. government and Federal agencies’ response to the 2007-2008 financial crisis. Asset-price bubble: what it is, when does it happen, what happens when it bursts.

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