Intermediate Microeconomic Theory
ECON 3710
Review Sheet #3
Spring, 2010
Dr. Tod Porter
1. What is the definition of the word “monopoly”? Why is the definition of the scope of
a market critical in deciding whether a firm is or is not a monopolist? How could the
cross-price elasticity provide evidence as to how the market should be defined?
2. What are the five sources of monopoly? Be able to explain in detail how economies
of scale can result in a monopoly. Be able to define the term natural monopoly.
3. Be able to define the term marginal revenue. For a given level of output, why is MR
less than price for a monopolist?
4. How are MR and the elasticity of demand related (specifically, what do we know
about the sign of MR and the value of the elasticity of demand)?
5. What is the profit-maximizing rule for a monopolist? Be able to draw a graph of a
monopolist earning an economic profit.
6. Under what conditions would a monopolist choose to shut down in the short run?
7. Does a monopolist choose an efficient level of output from society’s view? Be able to
identify the area representing the deadweight loss created by the monopolist (the
losses in both consumer and producer surplus).
8. Why won’t a monopolist ever choose a level of output on the inelastic portion of the
demand curve? How will the elasticity of demand affect the difference between MC
and price?
9. What is the potential disadvantage of using rate of return regulation to regulate a
natural monopoly? Of forcing a natural monopoly to produce at the point where
MC=P?
10. What is meant by the terms “monopsony” and “marginal expenditure”? Why is ME
greater than the price charged?
11. Show graphically the quantity purchased and the price paid by a monopsonist. Does
the existence of a monopsony create a deadweight loss? Be able to identify the loss
on the graph.
12. What kinds of behavior are prohibited by the Sherman Act? By the Clayton Act?
13. Be able to define the terms “predatory pricing” and “price fixing”.
14. Define the term “price discrimination.” Why must a price-discriminating firm be able
to prevent resale?
15. What is “first degree price discrimination”? Be able to show graphically. If a
monopolist is able to practice first degree price discrimination does the monopolist
create a deadweight loss?
16. What is “second degree price discrimination”?
17. What is “third degree price discrimination”? In which market will the firm charge the
highest price?
18. Be able to define the market structure “monopolistic competition”?
19. Will firms in a market with monopolistic competition earn a normal profit in the long
run? Justify your answer.
20. Will monopolistic competition result in a deadweight loss? If so, do economists
believe the loss justifies a policy response? Explain.
21. In the Cournot model, what assumptions are made about the behavior of the firms? In
the Bertrand model? How do the outcomes of these models compare with the price
and quanities produced under perfect competition and monopoly?
22. What roles do the firms play in the Stackelberg model? If both firms try to be the
Stackelberg leader what happens?
23. Be able to define the terms: implicit collusion, price signaling, price leadership.
24. What is the dominant firm model? Be able to find the amount produced and the price
charged on a graph representing the dominant firm model.
25. What is a cartel? What factors will determine whether a cartel is able to maintain its
control of a market?
26. Be able to define the following terms: game, strategy, optimal strategy, cooperative
game, noncooperative game.
27. What is a dominant strategy? Be able to determine if a player has a dominant strategy.
What is an equilibrium in dominant strategies?
28. What is a Nash equilibrium? Be able to determine if one or more Nash equilibrium
exist.
29. What is a sequential game? A “first-mover advantage”?
30. How does repeated play create the potential for cooperation? What is the “tit-for-tat”
strategy? Why might the players refuse to cooperate if there are a known number of
rounds in the game?
31. What is the difference between a pure and a mixed strategy?
32. What is the difference between a credible threat and an empty threat? How could a
player gain a higher pay off by reducing their available options?
33. What is the maximin strategy? In what sense is a maximin strategy conservative?
34. What is a two-part tariff? How would the firm set the usage fee in the case of a single
consumer? When there are multiple consumers, what is the tradeoff from lowering
the user fee?