Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
34 Cards in this Set
- Front
- Back
|
A firm sells its output to two different geographic al markets. It has monopoly power in each market. For any given total output of the firm, what rule should it use to determine how it directs its output between two different markets? |
the firm should allocate output to the two markets so that marginal revenue is the same in the two markets if marginal revenue in one market is greater than marginal revenue in the other market, the firm should increase the allocation in the high MR market and decrease the allocation in the other market |
|
|
A water monopolist faces a set of identical consumers who each have the following demand for water P = 1 - .02Q. Q=qty h2o in quarts and the numbers are $ values. Suppose that the water costs the monopolist $0.1. Propose a pricing scheme that extracts the largest possible amt of profit from each consumer
|
Charge a lump sum fee for access to h2o for $20.25 plus $0.10 for each quart of water Alternatively the monopolist could charge $24.75 for a fixed qty of 45 qts of h2o *graph in notes |
|
|
what are high powered incentives? Give an example of a relationship that creates these |
High Powered Incentives align the workers interests with those of the firm. A worker receives a fixed payment for completing a specified task, but has to pay the costs of completing the task, she will receive the full benefit of improved efficiency and will suffer the cost of reduced efficiency AKA- if the worker saves a dollar she keeps a dollar. if she wants a dollar she looses a dollar |
|
|
Set of tasks that can be done by contract (set payment for a set of defined tasks). When might you wish to have these done by an employee instead of by contract |
Employee is better if a task can't be fully specified in advance of a contract. BC the employee accepts a wage and receives direction, the firm can continually revise the employees instructions if its difficult for the firm to assess quality, the firm may want to avoid contract that might create incentives to increase output while reducing quantity |
|
|
What is a "norm" in normative economics? What is the norm that Landsburg uses? |
"Norm" is the objective that we use in determining whether something is good, or whether something is better than some alternative. Exps- wealth maximization, utilitarianism, or pareto efficiency. Lands burg uses wealth maximization and calls it efficiency, its a total value of everything we have valued by our willingness to pay |
|
|
Three Norms in economics |
1. Utilitarianism 2. Pareto-ism 3. Cost benefit analysis |
|
|
Utilitarianism |
-The greatest good for the greatest number Criticisms: -unobservable criterion -boundary problems -Utility monsters |
|
|
Pareto-ism |
Pareto improvement: a reallocation that makes some people better off without making anyone worse off Unanimity rule Decisions in small groups |
|
|
Pareto - Improvement |
someone is better off, no one is worse off
|
|
|
Pareto - Optimum |
There are no (further) pareto improvements available |
|
|
Problems with Pareto |
-Doesnt allow us to say anything about real-world tradeoffs (a change that makes some better off but also makes some worse off) -Actual public projects -Pareto improvements are a daily occurrence |
|
|
Efficiency Wealth Maximization |
Maximize the total value of the things we have as measure by willingness to pay
Equivalent to cost benefit analysis |
|
|
Cost benefit analysis |
Add up all the gains and losses in terms of peoples willingness to pay. -public projects -private transactions "The size of the pie" |
|
|
Consumer Suplus |
Difference between the highest price a consumer would be willing to pay for some quantity of a good and the amount the consumer actually pays |
|
|
Consumer Surplus example: The most I'm willing to pay for a new car is $22,500, if I can't get it for that ill stick with what I have. I find and purchase a car for $20,500 what is my consumer surplus? |
$2000 The difference between the two amounts |
|
|
Producer surplus |
Difference between the lowest price a producer would be willing to accept for supplying some quantity of a good and the amount the producer actually receives Area under price and above the supply curve |
|
|
Monopoly |
Single firm in the industry downward sloping demand definitional issues -legal -economic |
|
|
Pure monopoly |
-Rare -Utilities (often regulated monopolies) -athletic leagues -patented goods - for awhile -lots of narrow monopolies: novels, movies, music |
|
|
Monopoly Power |
-individual firm has the opportunity to elevate the price of its goods by restricting its own output -individual firm faces downward sloping demand |
|
|
Equimarginal Principle |
if an activity is worth doing at all, the optimal level is where marginal benefits = Marginal cost |
|
|
Marginal Revenue in Monopoly |
Not just price! its the additional revenue the firm receives as a result of producing an additional until of output |
|
|
MR in a single price monopoly |
MR < Price Q P TR MR 10 $14 $140 11 $13.50 $148.5 $8.50 Difference between TR of Q10 and TR of Q11 |
|
|
Social Welfare Loss |
-Goods that are not produced -Goods that cost less than they are worth, yet are not produced -loss of potential wealth -total value of benefits - consumer and producer surplus is small than it might be |
|
|
Monopoly DOES.... |
- takes account of the effect of output on price -reduces output to elevate price -causes social welfare loss |
|
|
Gains from Monopoly |
- Only monopoly will fully exploit economies to scale (for some production technologies) -network effects -competition for the field -patent and other intellectual property |
|
|
Price Discrimination |
Occurs where an individual seller chargers different prices for the same good, where the price difference does not reflect a difference in cost |
|
|
1st Degree price discrimination |
-Charging each consumer the most that he would be willing to pay for each unit that he buys -donut seller from hell -marching each customer down his demand curve -extracting all of the consumer surplus -perfect price discrimination -efficient |
|
|
2nd degree price discrimination |
-Charging a single customer different prices for identical items -confront all customers (or groups) with the same price schedule - 1st degree w error |
|
|
1st and 2nd degree examples |
-ticket books -two part pricing -country club memberships -declining block pricing - electricity -bundled goods |
|
|
3rd degree price discimination |
charging different prices in different markets |
|
|
3rd degree price discrimination examples |
-different regional markets including different countries -age group differences -income group differences -loyalty differences -usage differences |
|
|
Value Pricing |
-term used for price discrimination in some marketing literature -has become important in the pharmaceutical applications -the drug seller from hell |
|
|
Collusion |
-cartel -price fixing arrangement -trust -multi-plant firm |
|
|
|
|
