Chapter 10: Externalities: When the Price Is Not Right
What are externalities?
External costs or benefits that fall on bystanders
In a perfectly competitive market, a firm will set its price equal to ___.
the market price.
The ____ condition balances production across firms in a way that minimizes total industry costs of production.
P = MC
What is market power?
The power to raise price above marginal cost without fear that other firms will enter the market.
What is price discrimination?
Price discrimination: Selling the same product at different prices to different customers.
You pay $25 for a new hoodie. This is an example of what type of cost?
Private cost
What a type of cost that a firm should consider? Give an example.
True or False:
Firms in a perfectly competitive industry face the same market price.True.
True or False:
A monopoly is a firm with market power?True.
An oligopoly is a market that is dominated by how many firms?
A few firms.
What is a Pigouvian subsidy? Give an example
Pigouvian subsidy: A subsidy on a good with external benefits.
Example: COVID-19: External Benefits of Vaccination
Is the following an example of an above or below normal industry:
P > AC
Profits are above normal, causing capital and labor to enter the industry.
To maximize profit, firms produce at the level of output where Marginal cost is equal to what?
Firms must prevent what from occurring in order to successfully price discriminate?
Arbitrage: Taking advantage of price differences for the same good in different markets by buying low in one market and selling high in another market.
What is a Pigouvian tax? Give an example
Pigouvian tax: A tax on a good with external costs.
Ex: Tax on tobacco
What is marginal revenue and marginal cost?
•Marginal revenue (MR): The change in total revenue from selling an additional.
Marginal cost (MC):The change in total cost from selling an additional unit.
What will happen in a below normal industry?
If P < AC, profits are below normal, causing capital and labor to exit the industry.
As firms exit, supply ↓ price ↑ → profits ↑ for the remaining firms.
What is the total profit for a firm whose:
profit maximizing price = $12.50
Average cost per pill = $2.50
Profit maximizing quantity = 80
?
Profit-maximizing price = $12.50
Profit per pill = $10.00
Total profit = $10 × 80 = $800
Give an example of perfect price discrimination.
Perfect price discrimination: Each customer is charged their maximum willingness to pay.
What does the blue box indicate?
Efficient equilibrium: The price and quantity that maximize social surplus.
How would you calculate MR? MC?
MR: Change in TR/ Change in Q
MC: Change in TC/ Change in Q
What is the elimination principle?
Above-normal profits are eliminated by entry, and below-normal profits are eliminated by exit.
Name one source of Monopoly Power.
-Economies of scale
-Barriers to entry
-Network effects
-Innovation
Cartels try to increase their profits by doing what?
Reducing quantity