Test 2 Review

Ch. 5 - 183-198

1)Short-run Costs

  1. TC
  2. ATC
  3. AVC
  4. AFC
  5. MC
  6. Fixed vs. Sunk Costs

2)Multiple-Output Cost Functions

  1. Economies of Scope
  2. Cost Complementarity

Ch. 8 - 274-313

1)Perfect Competition

  1. Market characteristics
  2. Market demand vs. firm demand
  3. Profit-maximizing rule
  4. Economic profits
  5. Operating loss
  6. Shut-down rule
  7. Long-run competitive equilibrium

2)Monopoly

  1. Monopoly power
  2. Barriers to entry
  3. Profit-maximizing rule
  4. Determining the level of output, monopoly price, and profit
  5. Price discrimination

3)Monopolistic Competition

  1. Market characteristics
  2. Long-run equilibrium
  3. Product differentiation

Ch. 9 – 326-354

1)Oligopoly Basics

  1. Cournot Oligopoly
  2. Characteristics
  3. Reaction/response function
  4. Strategic variable
  5. Application to collusion
  6. Bertrand Oligopoly
  7. Characteristics
  8. Strategic variable
  9. Relation to perfect competition

Ch. 10 – 270-279 (365-373)

1)Game Theory Basics

  1. One-shot games
  2. Nash equilibrium
  3. Dominant strategy
  4. Prisoner’s dilemma type games
  5. Multi-stage games
  6. Sub-game Perfect Equilibrium
  7. Backward induction

Appendix – The Five Competitive Forces that Shape Strategy (373-393)

1a) Using a graph, labeling all axes and curves, illustrate a firm that is making a profit in the short-run in a perfectly competitive market structure, and denote on the graph the amount of profit the firm is making.

1b) What do you expect to happen to this firm’s profits in the long-run? What assumption about the perfectly competitive market structure implies this result?

2. / You are the manager of a monopolistically competitive firm. The inverse demand for your product is given by P = 200 - 10Q and your marginal cost is MC = 5 + Q.
a. What is the profit-maximizing level of output?
b. What is the profit-maximizing price?
c. What are the maximum profits?
d. What do you expect to happen to this firm’s profits in the long-run? Explain.

3. Suppose Toyota and Honda must decide whether to make a new breed of side-impact airbags standard equipment on all models. Side-impact airbags raise the price of each automobile by $1,000. If both firms make side-impact airbags standard equipment, each company will earn profits of $2.5 billion. If neither company adopts the side-impact airbag technology, each company will earn $1 billion (due to lost sales to other automakers). If one company adopts the technology as standard equipment and the other does not, the adopting company will earn a profit of $3 billion and the other company will lose $1.5 billion.

A. Use this matrix to express this game in normal form:

Honda
Toyota / Adopt Airbags / Don’t Adopt
Adopt Airbags
Don’t Adopt

B. What is the Nash equilibrium of this game?

4. Briefly comment on the cartoon below using one of Porter’s “Five Forces that Shape Strategy.” Be clear in which of the five forces you are considering.