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ECO100 - NOV 28 Test Review

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University of Toronto St. George
James Pesando

● No class next wednesday and monday Marginal cost falls and because of LDR it eventually rises 1. If MC schedule has usual slope, then: ● Intersects ATC at minimum ATC ● Intersects AVC at minimum AVC ● Why? - Arithmetic 2. Class (and text) examples: sometimes assume that MC is constant ● Why? ● To focus on an issue, in a case where the usual diagram would add complication, but not clarification Understanding Cost Schedules At Q=10, AVC=10 and ATC = 12. What is AFC when Q=8. ● TFC= TC-TVC = 10*12 - 10*10 = 20 ● When Q=8, AFC = 20/8 = 2.5 Oligopoly ● Cigarette producers (few, aware of mutual interdependence) ● Canada decided to ban advertising because of health concerns and there was no complain from the producers. ● Most advertising is not geared towards attracting new smokers but to cancelling the actions of other cigarette firms ● Payoff Matrix (No ban on advertising) Philip Morris Advertise Don't RJR Advertise on TV 10 million/year for 35 million/year for each RJR 5 million/year for Morris Don’t advertise 5 million/year for RJ20 million/year for 35 million/year for each philip morris ● Dominant strategy: advertise on TV, earn $10 million each ● Rational profit maximizing behaviour ● Ban on advertising: do not advertise on TV, earn $20 million each Remember: ● 1) Each firm cares only about its own profits (which it tries to maximize) ● 2) Each firm does not know what other firm will do ○ drives the need for a strategy ● 3) Each firm, for each possible action by the other, chooses its best strategy ● 4) There is a dominant strategy - the best strategy for each firm is the same, for both possible action
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