Know the following from ch. 6

1. Define and explain the significance of the following terms: profit, profit maximizing firm.

2. Define and explain what a perfectly competitive firm is and explain the four conditions that are characteristic of perfectly competitive markets.

3. Define and explain what is meant by the terms short run and long run. Relate these concepts to the following terms: factors of production, fixed factors of production, variable factors of production and the law of diminishing returns.

4. Relate the terms “short run” and “long run” to the following terms: fixed cost, variable cost, total cost and marginal cost.

5. Explain how a perfectly competitive firm chooses an output level that maximizes its profit.

· Do this both in words and using a graph.

· Connect this condition to the concept of marginal cost using the Cost-Benefit Principle.

· Show how profit can be calculated using the concepts of price, quantity and average total cost.

6. Explain the condition under which a perfectly competitive firm will continue to operate despite making a loss.

· Do this both in words and using a graph.

· Connect this condition to the concept of average variable cost.

7. Compare and contrast the effect of a change in variable cost on the profit maximizing output level with the effect of a change in fixed cost.

8. Explain how the firm’s marginal cost curve and the firm’s supply curve are related.

9. Define and explain the significance of the term producer surplus.

10. Calculate producer surplus using a linear supply curve.

Know the following from ch. 8

1. Understand the role played by economic profit in decision-making by firms.

2. Analyze how changes in demand and supply affect an individual firm’s profits.

3. Discuss the allocative function of price.

4. Explain the difference between economic rent and positive economic profit.

5. Apply the invisible hand to everyday phenomena, taking into account the time value of money.

6. Understand and explain the difference between market equilibrium and a social optimum.

Chapter 9: Monopolistic Competition & Pure or Perfect Monopoly

1. Define imperfect competition and explain how it differs from perfect competition.

2. Discuss the three types of imperfect competition.

3. Know the characteristics and examples of a monopolistic competition market structure.

4. Explain the term market power and relate this to the demand curve facing a firm.

5. Discuss five important sources of market power.

6. Know the characteristics of a monopoly market as the extreme case of imperfect competition.

7. Explain how a monopolist chooses an output level that maximizes its profit using a table of data.

8. Find the profit-maximizing level of output and price for a monopolist using a graph.

9. Know and be able to find on a graph the P* and Q* combination, and the monopoly profit or loss.

10. Be able to compare the P* & Q* combination of a private monopoly with those of a competitive market.

11. Analyze the effects of monopoly on consumer surplus, producer surplus and total economic surplus.

12. Define price discrimination and discuss particular methods of price discrimination.

13. Analyze the effects of price discrimination on consumer surplus, producer surplus and total economic surplus.

14. Discuss public policies applied to natural monopolies.

Chapters 10: Oligopoly, Games & Strategic Behavior

1. Know the characteristics and examples of an oligopoly market structure.

2. Know the meaning of ‘mutual interdependence’ and the implication for pricing decisions by
firms.

3. Describe the basic elements of a game.

4. Define a payoff matrix.

5. Discuss the meaning of dominant strategy, dominated strategy and Nash equilibrium.

6. Know how to use critical thinking to determine the dominant strategy.

7. Know and be able to use a dominant strategy to determine Nash equilibrium.

8. Know how to solve a game theory problem when government subsidies matter.

9. Explain what a decision tree is and how to use it to solve problems when time matters.

10. Use a decision tree to discuss the concepts of a credible promise and a credible threat.

11. Extend the prisoner’s dilemma to the repeated prisoner’s dilemma and tit-for-tat strategies.

12. Apply the prisoner’s dilemma to cartels.

Chapter 13: Labor Market

1. Know the significance of the circular flow diagram in real terms (outer arrow and in monetary
    terms (inner arrows).
2. Be able to explain why the resource markets are essential for understanding the goal-oriented
    behavior of the households and firms in the economy.
3. Know the characteristics of a competitive labor market.
4. Know why a firm’s demand for a factor/resource (e.g., labor) is a derived demand.
5. Know the constraints the face a firm when labor is the only variable input/factor of production.
6. Be able to explain why a firm’s demand for a factor is the factor’s value of marginal product
    (VMPL).
7. Know why the VMPL curve slopes downward; also, what determines its elasticity.
8. Know the factors that or things that can shift a firm’s demand for labor.
9. Be able to explain why the market demand for labor is the sum of individual firm’s demands.
10. Know the tradeoff between income and leisure: be able to explain why the supply of labor
     comes from workers maximizing utility of income (work) against utility form leisure.
11. Be able to explain the meaning of a reservation wage.

12. Be able to explain why labor supply curve is more elastic in the LR than in the SR.
13. Know how the labor market adjusts to a new equilibrium when there is a change from (a) the
demand side, and (b) supply side.

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