Final Exam Overview

Exam Logistics

• Date & Time: March 10th, Tuesday, 10am-12pm (in person)

• Allowed Materials: Pen, pencil, eraser, ruler, simple standard function calculator (not scientific)

• Format: Multiple-choice, short-answer, and long-answer questions

• Coverage: Cumulative, with emphasis on chapters not included in the midterm

Preparation Strategies

• Start studying early

• Review class notes and note shortcuts/tricks

• Redo poll questions, discussion, quizzes, problem sets, past midterms and finals

• Work in groups and compare answers

• Practice with end-of-chapter problems

• Sleep well before the exam

Key Microeconomics Topics

Perfect Competition: Short-Run vs. Long-Run Equilibrium

Perfectly competitive markets exhibit distinct behaviors in the short run and long run, especially in response to demand shocks.

• Short-Run Equilibrium: Firms may earn profits or losses; number of firms is fixed.

• Long-Run Equilibrium: Entry and exit adjust the number of firms; economic profit is zero; market supply curve is horizontal at .

• Entry/Exit Dynamics: Positive demand shocks attract entry; negative shocks cause exit.

Consumer Surplus, Producer Surplus, and Total Surplus

Surplus measures welfare in markets and is maximized in competitive equilibrium.

• Consumer Surplus (CS): Difference between willingness to pay and price paid.

• Producer Surplus (PS): Difference between price received and marginal cost; note PS ≠ profit.

• Total Surplus (TS): Sum of CS and PS.

• Formula:

• Competitive Equilibrium: Maximizes total surplus; allocates goods to highest WTP buyers and lowest MC sellers.

Pareto Efficiency and the Invisible Hand

Pareto efficiency is a key concept in welfare economics, and the invisible hand describes how self-interested behavior leads to efficient outcomes.

• Pareto Efficiency: An allocation where no one can be made better off without making someone else worse off.

• Invisible Hand: Competitive markets maximize total surplus and achieve Pareto efficiency.

• Breakdowns: Market power, government intervention, externalities, public goods, and asymmetric information can prevent efficiency.

Government Intervention: Taxes, Subsidies, Price Controls

Government policies affect market outcomes, welfare, and efficiency.

• Taxes: Per-unit and ad valorem taxes; incidence determined by elasticities.

• Effects: Changes in CS, PS, government revenue, total surplus, and deadweight loss.

• Subsidies: Benefit recipients, cause overproduction, increase government cost and deadweight loss.

• Price Ceilings/Floors: Can be binding or non-binding; cause shortages or surpluses; affect welfare.

• Deadweight Loss Formula:

• Example: A binding price ceiling below equilibrium causes a shortage and reduces total surplus.

Externalities and Market Failure

Externalities occur when private costs or benefits differ from social costs or benefits, leading to inefficiency.

• Marginal Private Cost (MPC) vs. Marginal Social Cost (MSC): MSC includes external costs.

• Marginal Private Benefit (MPB) vs. Marginal Social Benefit (MSB): MSB includes external benefits.

• Efficient Quantity: Where MSB = MSC, not necessarily market equilibrium.

• Deadweight Loss from Externalities: Area between MSC and MPC (or MSB and MPB) over the inefficient quantity range.

• Policy Solutions: Taxes/subsidies, Coase Theorem (property rights, bargaining, transaction costs).

Public Goods and Common Resources

Public goods and common resources are characterized by rivalry and excludability, affecting their provision and use.

• Public Goods: Non-rivalrous and non-excludable (e.g., national defense).

• Common Resources: Rivalrous but non-excludable (e.g., fisheries).

• Vertical Summation: Used to derive social marginal benefit for public goods.

• Tragedy of the Commons: Overuse of common resources; policy solutions include taxes, licenses, cap-and-trade.

Monopoly and Price Discrimination

Monopolies differ from perfect competition in pricing, output, and welfare effects.

• Barriers to Entry: Allow monopoly power.

• Downward Sloping Demand: Firm faces entire market demand.

• Marginal Revenue (MR): For linear demand , .

• Profit Maximization: ; find monopoly quantity and price.

• Price Discrimination: First-, second-, and third-degree; requires information and prevention of resale.

• Social Surplus and Deadweight Loss: Monopoly causes underproduction, higher prices, and deadweight loss.

Production Possibilities Curve (PPC) and Trade

PPC illustrates opportunity cost, comparative advantage, and gains from trade.

• Slope: Represents opportunity cost.

• Constant vs. Increasing Opportunity Cost: Linear vs. bowed-out PPC.

• Comparative vs. Absolute Advantage: Comparative advantage is based on lower opportunity cost.

• Mutually Beneficial Trade: Terms of trade must fall between opportunity costs.

• Gains from Trade: Allow consumption outside individual PPC.

International Trade: Small Open Economy Model

World price determines whether a country imports or exports; trade affects welfare.

• Imports/Exports: If world price is below domestic equilibrium, country imports; if above, exports.

• Winners and Losers: Consumers and producers are affected differently.

• Tariffs: Raise domestic price, reduce imports, create government revenue and deadweight loss.

• Sources of Deadweight Loss: Overproduction by inefficient producers, underconsumption by consumers.

Game Theory and Strategic Play

Game theory analyzes strategic interactions among players.

• Game Structure: Players, strategies, payoffs, information; simultaneous vs. sequential games.

• Dominant Strategies: Best response regardless of others' actions.

• Nash Equilibrium: No player can improve payoff by unilaterally changing strategy.

• Mixed Strategies: Randomization can be optimal; compute expected payoffs.

• Sequential Games: Use backward induction; identify subgame perfect Nash equilibrium.

• Credible vs. Non-Credible Threats: Commitment affects outcomes.

• Oligopoly: Apply correct equilibrium concept to predict outcomes.

Summary Table: Key Concepts and Their Applications

Additional info:

• These notes expand on brief study guide points to provide academic context and definitions.

• Formulas and examples are included for clarity and exam preparation.