ECON1130 Midterm 2

Perfect Competition

100

What condition determines a perfectly competitive firm's profit-maximizing output?

p=MC

200

A firm has:

• min AVC = 8
• min ATC = 12

If p = 10:

1. Does the firm shut down?
2. Is profit positive, zero, or negative?

1. No
2. Negative

Explanation:

No shutdown because 10>8 

Negative profit because 10<12

Firm stays open and loses money.

300

List all long-run competitive equilibrium conditions.

p=MC 

p=ATC 

π=0

Therefore p=MC=ATC at min ATC.

400

Demand: Q_D=100-P

Supply: Q_S=P

Find equilibrium price and quantity.

100-P=P 

100=2P

P^*=50

Q^*=50

500

Demand: Q_D=100-P

Supply: Q_S=P-10

Find:

• Price
• Quantity
• Consumer burden
• Producer burden

100-P = P-10 

110=2P

P_c=55

Q=45

Original price = 50

Consumer burden: 55-50=5

Producer receives: 55-10=45

Producer burden: 50-45=5

Tax split equally.

Monopoly

100

True or False:

A monopolist produces where demand is inelastic.

False, because MR would be negative.

200

Demand: P=30-Q

Find MR.

TR=(30-Q)Q 

TR=30Q-Q²

MR=30-2Q

300

Demand: P=30-Q

Cost: C(Q)=6Q

Find the monopoly quantity.

MR=30-2Q 

MC=6

30-2Q=6

Q^*=12

400

Demand: P=80-2Q

Cost: C(Q)=20Q

Find monopoly price.

MR=80−4Q

80−4Q=20

Q=15

P=80−2(15)=50

500

Demand elasticity is ε=5, MC = 20.

Find monopoly price.

P = 20/(1-(1/5))

P=25

Cournot / Oligopoly

100

In Cournot competition, firms choose:

A) Price
B) Quantity

B) Quantity

200

What is a reaction function?

A firm's profit-maximizing quantity as a function of rivals' quantities.

300

Demand: P=80-Q₁-Q₂

Firm 1 cost: C₁(Q₁)=20Q₁

Find Firm 1's reaction function.

π1=(80-Q_1-Q₂)Q₁ - 20Q₁

FOC:

60-2Q₁-Q₂=0

Q₁=30−0.5Q₂

400

Compared to Cournot equilibrium, does collusion result in higher or lower price?

Higher price.

As well as lower quantity and higher total profits.

500

Rank profits from largest to smallest:

Monopoly, Cournot, Perfect Competition

Monopoly, Cournot, PC

Elasticity, Taxes, and Price Controls

100

If demand is very elastic, consumers are ___ to price changes.

Very sensitive

200

State the point elasticity formula.

ε=(dQ/dP)*(P/Q)

300

Who bears more tax burden if demand is inelastic and supply is elastic?

Consumers

400

Consumer share of a tax formula:

E_s/(E_s+E_d)

500

A binding price ceiling creates what market outcome?

Shortage because Q_D>Q_S and deadweight loss.

Game Theory and Price Discrimination

100

If a strategy gives a player a higher payoff regardless of what the other player does, it is called a ____ strategy.

dominant

200

____ is a strategy profile where no player wants to deviate unilaterally.

Nash equilibrium

300

Under first-degree price discrimination, consumer surplus equals what?

CS = 0

400

Which consumers receive the lower price under third-degree price discrimination?

The more elastic group

500

Under third-degree price discrimination, what condition must hold?

MR₁ = MR₂ = MC