Study Guide
Microeconomics
Exam 3
1. List the characteristics for each market type--monopoly, oligopoly, monopolistic competition,
perfect competition. (Look for the pattern.)
2. Be able to draw the monopoly graph (all possible versions). State whether or not the market fails to
achieve allocative efficiency? If the market fails, what might the government do to reduce the
inefficiency. Give specific examples. What are the other types of inefficiencies that show up with the
monopoly? Explain.
3. List and define the 4 basic types of barriers to entry (as discussed in class). Give some real world
(specific) examples. Why do firms want to create barriers?
4. Explain and show graphically the motives for and problems in forming a cartel (lecture).
5. Define a natural monopoly. What is the “fair solution” for a natural monopoly? Why is it fair? Why
don’t we break-up natural monopolies into many smaller and competing firms?
6. What are the 4 different types of externalities. Give an example of each.
7. What is the allocative efficiency condition when externalities are present. Does the market fail when
externalizes are present? Why or why? Explain and show graphically. (Refer to a negative supply
externality, i.e., pollution in production.) Is there an argument for government intervention?
8. List and explain the 4 possible ways (as discussed in lecture) government can intervene when
polution in production is present.
9. Why is identifying the optimal level of pollution abatement difficult? That is, why can’t we simply
follow the optimization rule? (What is the optimization rule?) Why are pollution issues so
contentious? (There are 2 reasons as discussed in class.)
10. Give and example of each of the following. Explain why the market fails in each case and give an
example of how the government might intervene.
goods are rival and non-exclusive
goods are non-rival and exclusive,
goods are non-rival and non-exclusive.
Also be able to define non-rival and non-exclusive.
11. Be able to do a simple game theory problem. What is the key implication of game theory analysis
(lecture)? Apply game theory analysis to the cartel and to the Tragedy of the Commons (lecture,
video).
12. Explain Coase’s First Theorem. No credit for just memorizing it. (Lecture)
13. Explain what is meant by a market failure. Give some real world (specific) examples.