Microeconomics - Market Structures, Elasticity & Game Theory Flashcards

Question 1

What is a dominant strategy?

Accepted Answer

A dominant strategy is a strategy that yields the best outcome for a player regardless of what strategies the other players choose.

Question 2

What is a payoff matrix in game theory?

Accepted Answer

A payoff matrix is a table used in game theory to represent the outcomes (payoffs) for each player based on the combination of strategies chosen by all players.

Question 3

Explain the concept of the Prisoner's Dilemma.

Accepted Answer

A classic game theory scenario where two rational individuals, acting in their own self-interest, choose not to cooperate, even though cooperation would lead to a better collective outcome. It illustrates the tension between individual rationality and collective rationality.

Question 4

What are the key characteristics of a perfectly competitive market?

Accepted Answer

Many buyers and sellers, identical products, free entry and exit, and perfect information. Firms are price takers.

Question 5

What are the key characteristics of a monopoly?

Accepted Answer

Single seller, unique product with no close substitutes, significant barriers to entry, and the firm is a price maker.

Question 6

What are the key characteristics of monopolistic competition?

Accepted Answer

Many firms, differentiated products, free entry and exit, and some control over price.

Question 7

What are the key characteristics of an oligopoly?

Accepted Answer

Few large firms, interdependent decision-making, products can be identical or differentiated, and significant barriers to entry.

Question 8

How is equilibrium determined in a perfectly competitive market?

Accepted Answer

Equilibrium occurs where market supply equals market demand. For individual firms, profit maximization occurs where price equals marginal cost ($P = MC$).

Question 9

How does a monopolist determine its profit-maximizing output and price?

Accepted Answer

A monopolist maximizes profit by producing the quantity where marginal revenue equals marginal cost ($MR = MC$). The price is then set at the corresponding point on the demand curve for that quantity.

Question 10

Define deadweight loss and explain how it arises in a monopoly.

Accepted Answer

Deadweight loss is the reduction in total surplus (consumer + producer surplus) that results from a market distortion, such as a monopoly. A monopolist produces less and charges more than a perfectly competitive market, leading to some mutually beneficial transactions not occurring.

Question 11

Define consumer surplus.

Accepted Answer

Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good or service and the actual price they pay. It represents the benefit consumers receive from purchasing a good at a price lower than their maximum willingness to pay.

Question 12

Define producer surplus.

Accepted Answer

Producer surplus is the difference between the price a producer receives for a good or service and the minimum price they are willing to accept. It represents the benefit producers receive from selling a good at a price higher than their minimum acceptable price.

Question 13

Define total surplus (or social welfare).

Accepted Answer

Total surplus is the sum of consumer surplus and producer surplus. It represents the total benefits to buyers and sellers in a market.

Question 14

What is price elasticity of demand ($E_d$)?

Accepted Answer

Price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price.

Question 15

State the formula for price elasticity of demand.

Accepted Answer

The formula is $E_d = rac{\% \Delta Q}{\% \Delta P}$, where $\% \Delta Q$ is the percentage change in quantity demanded and $\% \Delta P$ is the percentage change in price.

Question 16

What does it mean for demand to be "elastic"?

Accepted Answer

Demand is elastic when the absolute value of price elasticity of demand is greater than 1 ($|E_d| > 1$). This means that a given percentage change in price leads to a larger percentage change in quantity demanded.

Question 17

What does it mean for demand to be "inelastic"?

Accepted Answer

Demand is inelastic when the absolute value of price elasticity of demand is less than 1 ($|E_d| < 1$). This means that a given percentage change in price leads to a smaller percentage change in quantity demanded.

Question 18

What does it mean for demand to be "unit elastic"?

Accepted Answer

Demand is unit elastic when the absolute value of price elasticity of demand is exactly 1 ($|E_d| = 1$). This means that a given percentage change in price leads to an equal percentage change in quantity demanded.

Question 19

List key factors that influence the price elasticity of demand.

Accepted Answer

Availability of close substitutes, necessity vs. luxury, definition of the market, time horizon, and proportion of income spent on the good.

Question 20

Define cross-price elasticity of demand and its formula.

Accepted Answer

Measures the responsiveness of the quantity demanded of one good to a change in the price of another good. Formula: $E_{xy} = rac{\% \Delta Q_x}{\% \Delta P_y}$. Positive for substitutes, negative for complements.

Question 21

Define income elasticity of demand and its formula.

Accepted Answer

Measures the responsiveness of the quantity demanded of a good to a change in consumer income. Formula: $E_I = rac{\% \Delta Q}{\% \Delta I}$. Positive for normal goods, negative for inferior goods.

Question 22

What is game theory?

Accepted Answer

Game theory is the study of strategic decision-making in situations where the outcome for each participant depends on the actions of all participants.

Question 23

Define Nash Equilibrium.

Accepted Answer

A Nash Equilibrium is a situation in a game where no player can improve their outcome by unilaterally changing their strategy, assuming the other players' strategies remain unchanged.

Microeconomics - Market Structures, Elasticity & Game Theory

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