FINAL EXAM REVIEW
THEORY OF CONSUMER CHOICE
Janet knows that she will ultimately face retirement. Assume that Janet will
experience two periods in her life, one in which she works and earns income, and
one in which she is retired and earns no income. Janet can earn $250,000 during
her work period and nothing in her retirement period. She must both save and
consume in her work period and can earn 10% interest on her savings.
a.
Use a graph to demonstrate Janet's budget constraint. On your graph,
show Janet at an optimal level of consumption in the work period equal to
$150,000. What is the implied optimal level of consumption in her retirement
period?
b.
Now, using your graph from part b above, demonstrate how Janet will be
affected by an increase in the interest rate on savings to 15%. Discuss the role of
income and substitution effects in determining whether Janet will increase, or
decrease her savings in the work period.
4 TYPES OF MARKET STRUCTURES
Types of market
structure
No. of firms
Type of products
Substitutes available
Ease of entry
Barriers to entry
Market power
Examples
Demand curve
Maximize profit
output (long run,
short run, P, MC,
MR, ATC)
Means to raise profit
Productive and
allocative
efficiencies
Perfect competitive
Monopolistic
Oligopoly
Monopoly
4 TYPES OF MARKET STRUCTURES
Types of market
structure
Perfect competitive
Monopolistic
Oligopoly
Monopoly
many
many
single
identical/homogeneous
slightly
differentiated
Few large,
interdependent
identical or
differentiated
Substitutes available
Perfect substitutes
Many close
substitutes
Good differentiated
substitutes
No close substitutes
Ease of entry
very low/ very easy
low
high
Very high
Horizontal (P=MR=AR)
Downward sloping
(MR<D)
Little to significant,
decide Q & P
Downward sloping
(MR<D)
significant
Farm…
Downward sloping
(MR<D)
Little, decide Q to
influence P in
some extent
Clothes…
Automobiles…
Electricity…
none
advertising
Price discrimination
achieved
Not achieved, but
closer to efficiency
Price and non-price
competition,
collusion
Not achieved
No. of firms
Type of products
Demand curve firm
faces
Pricing power
Examples
Maximize profit output
(long run, short run, P,
MC, MR, ATC)
Means to raise profit
Productive and
allocative efficiencies
None, price takers, only
decide Q
unique
decide Q & P
Not achieved
PROFIT MAXIMIZATION
Increase or Decrease output?
PERFECT COMPETITIVE MARKET
SHORT RUN
LONG RUN
Consider a competitive industry where all firms are
identical with cost function for each:
TC(q) = 200 + q2/2 + 10 q
The market demand is given by P= 55 – Q/20
Determine the long-run equilibrium price, quantity per
firm, market quantity and number of firms.
MONOPOLY
Monopoly P, Q?
Competitive (efficient) P, Q?
Monopoly profit? Deadweight loss?
Classify the following as a government-enforced barrier to entry, a barrier to entry
that is not government-enforced, or a situation that does not involve a barrier to entry.
a. A patented invention
b. A popular but easily copied restaurant recipe
c. An industry where economies of scale are very
small compared to the size of demand in the
market
d. A well-established reputation for slashing prices
in response to new entry
e. A well-respected brand name that has been
carefully built up over many years
f. A city passes a law on how many licenses it will
issue for taxicabs
g. A city passes a law that all taxicab drivers must
pass a driving safety test and have insurance
h. A well-known trademark
i. Owning a spring that offers very pure water
j. An industry where economies of scale are very
large compared to the size of demand in the
market
k. A permit required to conduct business operations
a.
A patent is a government-enforced barrier to
entry.
b.
This is not a barrier to entry.
c.
This is not a barrier to entry.
d.
This is a barrier to entry, but it is not governmentenforced.
e.
This is a barrier to entry, but it is not directly
government enforced.
f.
This is a government-enforced barrier to entry.
g.
This is an example of a government law, but
perhaps it is not much of a barrier to entry if most
people can pass the safety test and get insurance.
h.
Trademarks are enforced by government, and
therefore are a barrier to entry.
i.
This is probably not a barrier to entry, since there
are a number of different ways of getting pure
water.
j.
This is a barrier to entry, but it is not governmentenforced.
k.
This is a government-enforced barrier to entry.
MONOPOLISTIC
OLIGOPOLY
• Concentration ratio
• Nash equilibrium
• Dominant strategy