Topics for Final Exam
Principles of Microeconomics
Monday Nov 28, 1 pm


The final exam will be comprehensive. You will want to review the
Topics for Exam II and Topics for Exam 1.

We have covered these chapters since exam two: Ch 15, 16, 17, 22 (part)
The following topics have been covered since the second exam


I. The long run

A. competition in the long run

1. profits attract entry
2. losses cause exit
    a. exit (only in long run)
    b. short run
        i. minimize loss
        ii. shutdown
    c. Sunk Costs
        i. unrecoverable
        ii. no opportunity cost
        iii.. no impact on operating or exit decisions
        iv. only affect entry decision
3. long run competitive equilibrium

B. Returns to scale

1. economies of scale
2. constant returns to scale
3. diseconomies of scale
4. optimal scale

II. Monopoly

A. Profit Maximization

1. quantity from MC=MR
2. Price from demand curve

B. Reasons for Monopoly

1. barriers to entry
2. natural monopoly
3. behavior

C. The monopoly problem

1. high prices, low quantity, excess profits
2. inefficiency
    a. market distortions
    b. deadweight loss
3. no market discipline
4. incentive to monopolize

D.  Policy
    1. Antitrust
        a. Sherman Act, Clayton Act
        b. FTC, Dept of Justice
        c. consent decree, break-up
    2. regulation
        a. useful for natural monopoly
        b. set price at ATC
        c. regulatory problems
    3. public ownership
    4. other forces
        a. foreign competition
        b. technological change


 III. Oligopoly

A. Interdependence
1. small number of firms; highly concentrated market
2. game theory
    a. nash equilibrium (non-cooperative)
    b. cooperative equilibrium (joint profit maximization)
3. action and reaction

B. Coordination

1. cartel
2. collusion
3. tacit collusion

C. Mergers

1. horizontal
2. vertical
3. conglomerate
4. antitrust policy and mergers
    a. illegal to "substantially lessen competition"
    b. merger guidelines

IV. Product differentiation

A. quality differences
    1. product characteristics
    2. seller characteristics
        a. location
        b. service
        c. reputation

B. effects
    1. downward sloping demand curves
    2. increase market power
    3. more consumer choices

V. Monopolistic Competition

A. market structure
1. many firms (unconcentrated)
2. differentiated products
3. easy entry and exit

B. product differentiation and price dispersion
1. each firm/brand has its own downward sloping demand curve
2. different products have different prices

C. profit maximization
1. q* where MC=MR
2. find price on demand curve
3. graph looks like monopoly

D. long run
1. profits attract entry
    a. entry reduces demand and increases elasticity for existing firms
    b. price and profits fall, for existing firms
2. losses cause exit
    a. exit increase demand and reduces elasticity for remaining firms
    b. prices and profits rise, for remaining firms
3. long-run equilibrium
    a. profits and losses eliminated
    b. firms break-even
    c. similar to competition, but not at lowest ATC


VI. Information

A. Imperfect information causes market problems
1. search costs
2. complicating factors

B. Asymmetric Information
1. one party has access to information unavailable to other party
    a. seller (example: used cars)
    b. buyer (example: health insurance)
2. adverse selection

C. Signaling
1. can be used to provide information
    a. college education as signal to employers
    b. guarantees as signal of quality
2. costly
3. can reduce problems of asymmetric information  

D. Advertising
    1. Costs
    2. effects
        a. firm
        b. society

E. Information Policy



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