G202 EXAM 2 Study Guide for 2026

G202 EXAM 2 Study Guide for 2025

1. Market Power: exists when firms are able to restrict competition to sustain prices above marginal costs

2. Market power can exist with multiple rival firms if products are: differentiated and markets are segmented (NIKE VS ADIDAS/PEPSI VS COKE)

3. 4 Strategies to restrict competition: Market strategies (companies): - Guarding trade secrets

• control of an essential resource
• exclusive contracts and customer lock-in (Coke pays IU to keep pepsi away, Adidas pays IU for athletics/2 year cell phone contracts)
• collusion (form cartel and act as monopoly) (ILLEGAL) (separate businesses coming together to act as one)

4. 4 Strategies to restrict competition: NON-Market strategies (government): - Patent or copyright protection (give market power)

• Trade regulations (give domestic firms power)
• Government licensing
• Government or NGO certification

5. Profit Maximization: Optimal sales Target: Occurs where marginal revenue equals marginal cost MC=MR

6. If MR > MC . . .: then the firm could make a profit by selling one more unit

7. If MC > MR . . .: then the firm would lose money on selling one more unit

8. Profit Maximization: Optimal Price: Price is found as markup over costs, where the markup factor depends on the demand for the product

9. Perfect Price Discrimination: Each consumer is charged a price equal to her willingness top pay

10.      Imperfect Price Discrimination: Groups of consumer are charged different prices

11.      T or F: A firm with market power will have a higher markup of price over cost when its demand is inelastic?: TRUE

12.      When compared to the efficient industry, a firm w/ significant market power will....: produce less output & charge a higher price

13.    If a country does not have a comparative advantage in producing a good & opens up to free trade of the good, the welfare in the domestic market increases b/c....: CONSUMER SURPLUS increases more than PS decreases 14. Relative to charging a single market price, when movie theaters charge different prices to different groups....: increase PRODUCER SURPLUS, as some consumer surplus is changed into PS

15.      The import tariffs that Pres. Bush placed on imported steel likely had what effect?: Domestic steel consumers were hurt, while domestic steel producers were helped

16.      Suppose the US reduced the tariff on tv sets, allowing foreign - produced tvs to more freely enter the US market. Which of the following would occur?: The price of tvs to US consumers would decrease, and US production of tvs would decrease.

17.      Basics of Game Theory: Players: These are the decision makers within the game.

-              Usually within firms, government, or interest groups

-              Focused on their OWN payoff

-              Will NOT give up their payoff to make rivals lose payoff

18. Basics of Game Theory: Strategies (decisions, choices): These are the decision choices.

- Price, Products, Advertising, Campaigning, Lobbying, Regulation

19. Basics of Game Theory: Payoffs (possible outcomes): These are the outcomes of the decision choices.

- Usually profits and losses

20. Dominant Strategy:: A strategy that results in the highest payoff for a player regardless of what strategy the rival plays

-              not strategic, robotic

-              rival has no influence