IndexCardTemplate Exam3

Max possible amt of surplus monopolistic competition

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Max possible amt of surplus. Monopolistic Competition: 1) lots of firms 2) no barriers to entry 3) unique or “differentiated” product. Same as monopoly in short-run, but in long run, because there are no barriers to entry, ATC will become tangent to D, and only normal profit is possible. Produces below capacity. MR<P . Oligopoly: just a few firms with medium barriers to entry. Duopoly: a market in which there are only two firms. Collusive agreements/cartels restrict output and increase price; illegal. Natural monopolies: one firm can supply the entire market at a lower cost than 2 or more firms. Unregulated: MC=MR; D. Overproduction compared to eff amt. Marginal Cost Pricing Rule: produce where P=MC. Firm’s Q must be amt ppl demand, produce efficient Q b/c producing where MB=MC. Eco loss. D and MC intersect. Avg. Cost Pricing Rule: produce where P=ATC. Causes a normal profit, but also causes a DWL (underproduction). ATC and D intersect. Price cap incentive regulation: pricing involves: 1) setting a max price the firm can charge 2) letting firms keep any profit they make form bringing costs down below that price 3) readjusting price cap periodically. Cut costs, eff pro. Sherman Act: sec1: outlaws every contract, combination in the form of a trust or otherwise, or conspiracy in restraint of trade; sec2: made “every person who shall monopolize or attempt to monopolize, guilty of a felony”; price fixing amongst competitors per se illegal. Clayton Act: prohibited if they “substantially lessen competition or create monopoly”; price discr, serving on the board of directors of competing companies, exclusive deals, tying contracts, acquisition of competing companies. Excludable: can charge. Rival: more than one user can use the good at once. Private good: excludable and rival. Public good: nonexcludable and nonrival. Common resource: rival but non-excludable; eff MSB=MSC. Tragedy of Commons: MPB>MSB. Substitution effect: supply curve backward-bending, income effect becomes larger than subst effect. Pos slope if the subst effect outweighs income effect. If subst effect is larger than income effect for labor, a wage increase will be met by an increase in supply of labor. When supply of labor increases as wages increase. Income effect: when supply decreases when wages increase. If wage rate rises, subst effect gives a household the incentive to increase the Qs and income effect gives a household the incentive to decrease the Qs. MSC=MC+MEC . Eff: MSC intersect MB. Eq: MC intersect MB. Tax=MEC achieve eff. External Benefit: MSB>MPB. A decrease in cost of hiring low-skilled workers causes shift to right of supply curve for low-skilled
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