pam 200 final - Prelim 1: An irrational addict has a price...

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Prelim 1: An irrational addict has a price elasticity of demand for drugs that is 0. Addictive behaviors respond to incentives Firm’s MC= change in total cost if firm produces one more unit of output Cross price elasticity is positive when two goods are substitutes A consumers willingness to trade one good for another can be expressed by both the consumers indifference curve and marginal rate of substitution If a person supplies more hours of labor in response to a wage inc then the substitution effect is greater than the income effect The price elasticities of supply and demand influence the tax incidence of a specific tax or ad valorem tax The substitution effect can be measured holding utility constant A consumer price index adjustment overcompensates for inflation bc it ignores the substitution effect when relative prices change Indiff curve for perfect substitutes are downward sloping and straight Production function- max level of output generated from given levels of input Prelim 2: Monopoly maximizes profit by setting MR=MC but not = P Firm shuts down in SR if TR does not cover variable costs Patents: might reduce welfare if granted for too long a period, will create a profit incentive to do research, and serve as a barrier to entry MR is: the inc in TR from selling one more unit of output, =p when price elasticity of demand is infinite, = p(1+1/e) If a firm makes 0 economic profit, then the firm is indifferent btw staying and exiting industry Demand curve is horizontal if consumers view output of any firm in a market to be indentical to the output of any other firm in the market Prisoners dilemma is a game where the payoff from playing dominant strategy is highest payoff possible General equilibrium analysis is study of: the effects of a change in a market and all the spillover effects in all related markets, how an equilibrium is determined in all closely related markets, and how an eq is determined in all markets simultaneously A cartel is a group of firms that attempts to maximize joint profit Natural monopoly is when one firm can produce the total output of the market at lower cost than several firms Rent seeking in the form of lobbying for an increase in import tariffs by domestic producers increases the DWL. The total welfare in a market that includes a govt sales tax equals consumer surplus plus producer surplus plus govt tax revenue If only 2 ppl are trading their endowments and no production is possible, then the equilibrium will be on their contract curve
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Collusion is more likely to occur when there is a fear of punishment for not
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pam 200 final - Prelim 1: An irrational addict has a price...

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