Game Theory and Discount Rates
Game Theory: The study of strategic interactions among two or more economics
Strategic Decision: An action made based on the anticipation of others actions.
Simultaneous Game: A game in wh
The industry structure between perfect competition and monopoly is known as
Oligopoly: A market structure characterized by competition among a small
number of firms.
Percent Discounted Value
The Rule of 72
Rule-of-thumb for approximating how long it will take for a balance growing at
any constant interest rate to double.
Divide 72 by the per-period interest rate.
The quotient will be the approximate nu
Oligopoly with Identical Goods: Collusion and Cartels
o Firms make identical products.
o Industry firms agree to coordinate their quantity and pricing decision, and
no firm deviates from the agreement even if b
o Industry firms sell differentiated products that consumers do not view as
o Other firms choices affect a firms residual demand curve, but the firm
The Deadweight Loss of Market Power
The dead weight loss of market power is completely lost. No transfer occurs.
o Base is the difference between the firms output with market power and its
output under perfect competition
Social Surplus and Characteristics of P.C. Firms
A firms Short-Run Supply Curve in a Perfectly Competitive Market
Only the portion of the marginal cost curve above the minimum average variable
cost will be on the firms supply curve.
Oligopoly with Identical Goods: Cournot Competition
o Firms sell identical products.
o Firms compete by choosing a quantity to produce.
o All goods sell for the same price the market price, which is determi
Profit Maximization with Market Power
Step 1: Derive the marginal revenue curve from the demand curve.
This is a linear inverse demand curve in the form . The marginal revenue curve
for this type of demand curve is . Hence, for this demand
Because a firm faces a downward sloping demand curve, it can only sell more of
its good by decreasing its price.
Because firms with market power recognize the relationship between output and