Week 5

Our understanding of firms' costs allows us to study firms' market behavior, namely their decisions about whether to operate, and how much to produce. We can apply this for firms in several "market structures": perfect competition, monopoly and quantity-choice duopoly (which is called Cournot duopoly).

We will also discuss a useful way of comparing market outcomes which economists call “welfare.” Comparing levels of welfare is similar to comparing (Pareto) efficient and inefficient outcomes, as we did in the General Equilibrium unit. However, …

• Welfare can be measured, while efficiency is 0-1 (either an outcome is efficient or it isn't).
• A higher level of welfare is not unambiguously better; it is part of normative economics.

Welfare is highest when the quantity traded is determined by the intersection of the Demand and Marginal Cost curves, at Q*, the competitive market quantity. We will compare this welfare-maximizing outcome with what happens under different market structures and under market interventions in a competitive market — like price ceilings and floors and per-unit taxes.

If there is time before Thursday, we will discuss measures of market power, which suggest where an imperfectly competitive market — like an duopoly — lies on the continuum between the two extremes of perfect competition and monopoly. Next week, we will use game theory to consider strategic issues firms face.

Regarding the second and last midterm. The midterm will be cumulative, so topics and small exercises from before midterm 1 might appear (but not long ones, like the price response decomposition, which will only be seen again, possibly, on the final). I plan to set aside Thursday's class for midterm prep, so please prepare any questions you would like to go over.

### Quiz 7: Perfect competition and welfare

You may need to do any or all of the following

• Solve for the equilibrium n*, q*, P* as in WB 14
• Calculate the CS, PS and DWL before and after a price floor or ceiling
• Firm optimization in the short run

### Midterm 2

New stuff not on earlier quizzes:

• Price ceilings and floors
• Welfare calculations
• CS, PS, DWL calculations
• Graphing
• The monopoly problem
• Solve the monopolist's problem for QM, PM
• Calculate the CS, PS, and DWL of the monopoly
• Graphing
• General Equilibrium/Supply-and-Demand in two markets

### Next week's quizzes (anticipated)

• Per-unit taxes
• Welfare calculation
• CS, PS, DWL calculations
• Government revenue calculation
• Graphing
• The full monopolist's problem
• Given technology, find costs
• (Do the stuff above)
• Also find the Lerner Index (LI)
• Cournot duopoly
• Solve for the equilibrium q1*, q2*, P*
• Calculate the CS, PS and DWL of the duopoly
• Calculate the markup for the duopoly
• Plain game theory
• Solve a normal-form games for all its Nash equilibria
• Solve an extensive-form game using backward induction
• Solve for equilibrium in a Stackelberg duopoly
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