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Chapter 7. CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF

MARKETS
Ø Consumer surplus: thặng dư tiêu dùng: phần tiền dư còn lại sau khi mà người mua
đã mua 1 sản phẩm
- Willing to pay (WTP): the maximum amount that a buyer will pay for a good: số tiền tối
đa mà người mua sẵn sàng trả cho một sản phẩm
CS = WTP – Price = 𝟏/𝟐 x (𝐏𝐦𝐚𝐱 – P1) × Q1

Ø Producer surplus: thặng dư sản xuất: phần dư còn lại sau khi mà người bán đã lấy
phần tiền được trả cho 1 sản phẩm trừ đi chi phí sản xuất của sản phẩm đó
PS = Price – Cost = 𝟏/𝟐 x (P1 − 𝐏𝐦𝐢𝐧) × Q1
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Ø Total surplus: tổng thặng dư: bao gồm thặng dư tiêu dùng và thặng dư sản xuất.
Có 2 cách tính:
- Cách 1:
𝑻𝑺 = 𝑪𝑺 + 𝑷𝑺 = (𝐖𝐓𝐏 – 𝐏𝐫𝐢𝐜𝐞) + (𝐏𝐫𝐢𝐜𝐞 – 𝐂𝐨𝐬𝐭) = 𝑾𝑻𝑷 – 𝑪𝒐𝒔𝒕
- Cách 2:
𝑻𝑺 = 𝑪𝑺 + 𝑷𝑺 =𝟏/𝟐 x (𝐏𝐦𝐚𝐱 – 𝐏𝐨) × 𝐐𝐨 + 𝟏/𝟐 x (𝐏𝐨 − 𝐏𝐦𝐢𝐧) × 𝐐𝐨
=𝟏/𝟐 x (𝐏𝐦𝐚𝐱 − 𝐏𝐦𝐢𝐧) × 𝐐𝐨

Quick Quiz
1. Jen values her time at $60 an hour. She spends 2 hours giving Colleen a massage.
Colleen was willing to pay as much at $300 for the massage, but they negotiate a price
of $200. In this transaction,
a. consumer surplus is $20 larger than producer surplus.
b. consumer surplus is $40 larger than producer surplus.
c. producer surplus is $20 larger than consumer surplus.
d. producer surplus is $40 larger than consumer surplus.
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2. The demand curve for cookies is downward-sloping. When the price of cookies is $2,
the quantity demanded is 100. If the price rises to $3, what happens to consumer
surplus?
a. It falls by less than $100.
b. It falls by more than $100.
c. It rises by less than $100.
d. It rises by more than $100.
3. John has been working as a tutor for $300 a semester. When the university raises the
price it pays tutors to $400, Jasmine enters the market and begins tutoring as well. How
much does producer surplus rise as a result of this price increase?
a. by less than $100
b. between $100 and $200
c. between $200 and $300
d. by more than $300
4. An efficient allocation of resources maximizes
a. consumer surplus.
b. producer surplus.
c. consumer surplus plus producer surplus.
d. consumer surplus minus producer surplus.
5. When a market is in equilibrium, the buyers are those with the ________ willingness
to pay and the sellers are those with the ________ costs.
a. highest, highest
b. highest, lowest
c. lowest, highest
d. lowest, lowest
6. Producing a quantity larger than the equilibrium of supply and demand is inefficient
because the marginal buyer’s willingness to pay is
a. negative.
b. zero.
c. positive but less than the marginal seller’s cost.
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d. positive and greater than the marginal seller’s cost

CHAPTER 13. THE COST OF PRODUCTION

Ø Total revenue: The amount a firm receives for the sales.
TR = P x Q
Ø Total cost: The market value of the inputs in the production.
- Explicit costs: require money.
- Implicit costs: Ignore money (accounting).
TC = Explicit costs + Implicit costs.
Ø Profit:
- Economic profit:
Profit = TR – TC.
- Accounting profit:
Accounting Profit = TR – Explicit costs.
ð Accounting profit > Economic profit.
Ø Production function: Relationship between:
- Quantity of inputs.
- Quantity of outputs.
Ø Margnal product:
- Add 1 unit => Increase Quantity of outputs.
- Slope of the production function.
∆𝑜𝑢𝑡𝑝𝑢𝑡
𝑀𝑃 =
∆𝑙𝑎𝑏𝑜𝑢𝑟
Ø Diminishing marginal product:
- Marginal product declines when the Quantity of outputs increases.
Ø Total cost curves:
- Fixed costs (chi phí cố định): costs do not vary with the quantity of output produced,
unaffected by production. Ex: House renting, Land renting…
- Variable costs (chi phí thay đổi): costs vary with the quantity of output produced.
Produce nothing=> VC=0.
TC = FC + TVC = FC + VC x Q
!"
- Average fixed cost (Chi phí cố định bình quân): 𝐴𝐹𝐶 = #
$"
- Average variable cost (Chi phí thay đổi bình quân): 𝐴𝑉𝐶 = #
%"
- Average total cost (Chi phí sản xuất bình quân từng sản phẩm): 𝐴𝑇𝐶 = #
∆%"
- Marginal cost (Chi phí sản xuất tăng thêm khi sản xuất thêm 1 sản phẩm): 𝑀𝐶 = ∆#
Ø Shapes:
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- ATC: u -shaped.
- AFC: shaped falling.
- AVC: shaped rising.
- MC: shaped rising.
Ø Efficient scale: Quantity of output that minimizes ATC.
- MC < ATC: ATC is falling.
- MC > ATC: ATC is rising.
- MC = ATC: ATC is min: The intersect between ATC and MC.
Ø Relationships between short-run and long-run ATC

- Many decision:
Fixed in short run.
Variable In the long run.
- Firms- greater flexibility in the long run
Long – run cost curves: flatter than short – run cost curves.
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Short – run cost curves: Lie on or above long – run cost curves.
- Economies of scale: a long – run ATC decreases when Q increases.
- Diseconomies of scale: a long run ATC increases when Q increases.
- Constant returns to scale: a long run ATC unchanges when Q changes.
Quick Quiz
1. Xavier opens up a lemonade stand for two hours. He spends $10 for ingredients
and sells $60 worth of lemonade. In the same two hours, he could have mowed his
neighbor’s lawn for $40. Xavier has an accounting profit of _____ and an economic
profit of ____.
a. $50, $10
b. $90, $50
c. $10, $50
d. $50, $90
2. Diminishing marginal product explains why, as a firm’s output increases,
a. the production function and total-cost curve both get steeper.
b. the production function and total-cost curve both get flatter.
c. the production function gets steeper, while the total-cost curve gets flatter.
d. the production function gets flatter, while the total-cost curve gets steeper.
3. A firm is producing 1,000 units at a total cost of $5,000. If it were to increase
production to 1,001 units, its total cost would rise to $5,008. What does this
information tell you about the firm?
a. Marginal cost is $5, and average variable cost is $8.
b. Marginal cost is $8, and average variable cost is $5.
c. Marginal cost is $5, and average total cost is $8.
d. Marginal cost is $8, and average total cost is $5.
4. A firm is producing 20 units with an average total cost of $25 and a marginal cost
of $15. If it were to increase production to 21 units, which of the following must
occur?
a. Marginal cost would decrease.
b. Marginal cost would increase.
c. Average total cost would decrease.
d. Average total cost would increase.
5. The government imposes a $1,000 per year license fee on all pizza restaurants. As
a result, which cost curves shift?
a. average total cost and marginal cost
b. average total cost and average fixed cost
c. average variable cost and marginal cost
d. average variable cost and average fixed cost
6. If a higher level of production allows workers to specialize in particular tasks, a
firm will likely exhibit ________ of scale and ________ average total cost.
a. economies, falling.
b. economies, rising.
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c. diseconomies, falling.
d. diseconomies, rising.
CHAPTER 14. FIRMS IN COMPETITIVE MARKET
Ø Market structure:

Perfectly Monopolistic Oligopoly Monopoly

competitive competitive
(important)
# of firms Many Many Few large Single
Type of Same/ Slightly Identical or Unique
products Identical differentiated differentiated
Substitutes Perfect Many close Differentiated No close
goods (Càng substitutes substitutes substitutes substitutes
có nhiều loại
hàng giống
nhau sẽ càng
có nhiều
substitutes)
Entry Very easy Easy Hard Very hard
Market None, price Little Little to Significant
power takers (No significant
affect
Examples Ice-cream, Clothes, Automobiles, Electricity,
vegetables, Coffee, air travel. invention
agricultural restaurants Microsoft certificate,
products Word, Diamond –
Smartphone field (mỏ
kim cương)

Ø Characteristics:
- Many buyers and sellers => price takers.
- The same goods.
- Free entry or exit.
Ø The revenue of a competitive firm:
- Total revenue: 𝑇𝑅 = 𝑃 × 𝑄
%'
- Average revenue (doanh thu bình quân): 𝐴𝑅 = # = 𝑃
∆%'
- Marginal revenue (doanh thu cận biên): 𝑀𝑅 = ∆#
Ø Profit maximization:
- MR>MC => increase Q to increase profit
- MR<MC => decrease Q to increase profit.
- MR=MC => profit – maximizing Q.
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Ø Shutdown vs. Exit:

- Shutdown (đóng cửa): A short – run decision not to produce anything because of market
conditions. => Based on AVC curve.
Shutdown if: TR < TC
TR/Q < TC/Q
P < AVC
- Exit (rời bỏ): a long – run decision to leave the market. => Based on ATC curve.
Exit if: TR < TC
TR/Q < TC/Q
P < ATC
Enter if: P > ATC
- Sunkcost: a cost thay has already been committed and cannot be recovered (chi ra không
thu hồi lại được).
Shortrun: FC là sunk cost => Không ảnh hưởng tới quyết định của công ty cho shut down.
Longrun: FC trở thành VC.
Ø Measuring profit:
Profit = TR – TC
= (P – ATC) Q
- Short – run:
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- Long – run:

Ø Market supply: Assumptions

- All existing firms and potential entrants have identical costs.
- Each firm’s costs do not change as other firms enter or exit the market.
- The number of firms in the market is:
+ Fixed in the short run (due to fixed costs)
+ Variable in the long run (due to entry and exit)
- SR Market Supply Curve
Example: 1000 identical firms.
At each P, market Qs = 1000 x (one firm’s Qs)
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Long-run equilibrium: The process of entry or exit is complete – remaining firms can
earn zero economic profit.
Zero economic profit: P = ATC
P = MR = MC = Minimum ATC.
- LR Market Supply Curve:

P ≥ AVC, each firm will produce its profit – maximizing quantity, where MR = MC

- LR & SR Effects of an increase in Demand

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Increase D=> P rises => Profit induce entry => S shift right => P decrease =>
Profit decrease => Profit = 0

LR Supply Curve Horizontal:

+ All firms have identical costs.
+ Cost do not change as other firms enter or exit the market.

LR Supply Curve Slope Upward:

+ Firms have different costs.
• As P increases=> Firms with lower cost enter first
• Further increases in P make it worthwhile for higher-cost firms to enter => Qs
increases
• Hence, LR market supply curve slopes upward.
• At any P,
• For the marginal firm,
P = minimum ATC and profit = 0.
• For lower-cost firms, profit > 0.
+ Costs rise as Firms Enter the Market.
• In some industries, the supply of a key input is limited (ex: there’s a fixed
amount of land suitable for farming).
• The entry of new firms increases demand for this input, causing its price to
rise=>increases all firms’ costs.
• Hence, an increase in P is required to increase the market quantity supplied,
so the supply curve is upward-sloping.

Quick Quiz
1. A perfectly competitive firm
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a. chooses its price to maximize profits.

b. sets its price to undercut other firms selling similar products.
c. takes its price as given by market conditions.
d. picks the price that yields the largest market share.
2. A competitive firm maximizes profit by choosing the quantity at which
a. average total cost is at its minimum.
b. marginal cost equals the price.
c. average total cost equals the price.
d. marginal cost equals average total cost.
3. A competitive firm’s short-run supply curve is its ________ cost curve above its
________ cost curve.
a. average total, marginal
b. average variable, marginal
c. marginal, average total
d. marginal, average variable
4. If a profit-maximizing, competitive firm is producing a quantity at which marginal
cost is between average variable cost and average total cost, it will
a. keep producing in the short run but exit the market in the long run.
b. shut down in the short run but return to production in the long run.
c. shut down in the short run and exit the market in the long run.
d. keep producing both in the short run and in the long run.
5. In the long-run equilibrium of a competitive market with identical firms, what are
the relationships among price P, marginal cost MC, and average total cost ATC?
a. P > MC and P > ATC.
b. P > MC and P = ATC.
c. P = MC and P >ATC.
d. P = MC and P = ATC.

CHAPTER 15. MONOPOLY

Ø Characteristics:
- Only 1 or single seller => price marker (market power)
- Unique good, no close substitutes.
- Optimum production
- No competition
- Barriers to entry:
Monopoly resources: DeBeers owns most of the world’s diamond mines.
Government regulation: patents, copyright laws
Natural monopoly: a single firm can produce the entire market Q at lower ATC
than could several firms. Ex: 10000 homes need electricity.
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- Không có đường Supply

- P>MR : To sell a larger Q, the firm must reduce P
- 2 effects on TR:
The output effect: Q increases => TR increases.
The price effect: P decreases => TR decrease.
ð MR < 0 if PE > OE
Ø Profit – maximization:
MR = MC
𝜋 = (𝑃 − 𝐴𝑇𝐶)𝑄
Monopoly Competitive

- Deadweight loss: P>MC: A cost to society created by market inefficiency, which occurs
when supply and demand are out of equilibrium
1
𝐷𝑊𝐿 = (𝑄( − 𝑄) )(𝑃 − 𝑀𝐶)
2
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Ø Public Policy
- Antitrust laws (luật chống độc quyền): cấm những hành động phá bỏ cạnh tranh
(anticompetitive practices) cho phép chính phủ phá vỡ monopolies.
- Regulation
- Public ownership
- Doing nothing
Ø Price discrimination: the business practice of selling the same good at different
prices to different buyers.
Example: Movie tickets, Airline prices, Discount coupons, Need -based financial
aid, Quantity discounts…
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Quick Quiz
1. A firm is a natural monopoly if it exhibits the following as its output increases:
a. decreasing marginal revenue.
b. increasing marginal cost.
c. decreasing average revenue.
d. decreasing average total cost.
2. For a profit-maximizing monopoly that charges the same price to all consumers,
what is the relationship between price P, marginal revenue MR, and marginal cost
MC?
a. P = MR and MR = MC.
b. P > MR and MR = MC.
c. P = MR and MR > MC
d. P > MR and MR > MC.
3. If a monopoly’s fixed costs increase, its price will _____ and its profit will _____.
a. increase, decrease.
b. decrease, increase.
c. increase, stay the same.
d. stay the same, decrease.
4. Compared to the social optimum, a monopoly firm chooses
a. a quantity that is too low and a price that is too high.
b. a quantity that is too high and a price that is too low.
c. a quantity and a price that are both too high.
d. a quantity and a price that are both too low.
5. The deadweight loss from monopoly arises because
a. the monopoly firm makes higher profits than a competitive firm would.
b. some potential consumers who forgo buying the good value it more than its
marginal cost.
c. consumers who buy the good have to pay more than marginal cost, reducing
their consumer surplus.
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d. the monopoly firm chooses a quantity that fails to equate price and average
revenue.
6. When a monopolist switches from charging a single price to practicing perfect
price discrimination, it reduces
a. the quantity produced.
b. the firm’s profit.
c. consumer surplus.
d. total surplus.
7. Suppose a firm has a monopoly on the sale of widgets and faces a downward-
sloping demand curve. When selling the 100th widget, the firm will always receive
a. less marginal revenue on the 100th widget than it received on the 99th widget.
b. more average revenue on the 100th widget than it received on the 99th widget.
c. more total revenue on the 100 widgets than it received on the first 99 widgets.
d. a lower average cost per unit at 100 units output than at 99 units of output.

CHAPTER 16. MONOPOLISTICS COMPETITION

Ø Characteristics:
- Many sellers => price maker but facing competition.
- Product differentiation.
- Free entry and exit => Economic profit = 0
- Examples: Coffee shops, Hairdressers, Bottles water, clothing, Sneakers, fast food,…
Ø In the Short run:
- Profit:
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Downward sloping demand curve

Tại mỗi Q, MR < P.
Max profit ó MR = MC
Dựa vào Demand curve => set P

- Losses:

Tại Q nơi MR = MC, P < ATC

Min Loss ó MR = MC
ð In short run, firm behaviour is very similar to monopoly.
Ø In the Long run:
- If profit in SR: Enter=>D decrease=>P falls=> 𝜋 falls.
- If loss in SR: Exit=> D increase=> P increase=> 𝜋 rises.
- Entry and exit=> P=ATC and 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝜋 = 0
- Monopolistic is less efficient than Perfect:
Excess Capacity:
+ Monopolistic vận hành trên đường dốc xuống của ATC, sản xuất ít hơn, cost –
minimizing output.
+ Perfect sản xuất Q sao cho ATC nhỏ nhất
Makeup over MC: Công ty sẽ tính thêm phí trên MC, Markup cost là phần chênh
lệch giữa giá và chi phí
+ Monopolistic: P>MC
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+ Perfect: P=MC
Monopolistic Competition Competitive

Ø Welfare:
- The product – variety externality: người tiêu dùng dư thừa nhận được từ việc ra mắt
sản phẩm mới.
- The business – stealing externality: gánh phải lỗ do sự rời đi của những công ty cũ khi
có những công ty mới gia nhập thị trường.
Ø Advertising:
- More differentiated => More advertising.
- 1 công ty sẵn sàng chi 1 số lượng lớn tiền vào advertising => quality of product =>
consumers regardless of contents.
- Arguments:
For: thúc đẩy competition & giảm thiểu market power.
Against: Cản trở competition, khiến người ta hiểu nhầm rằng các sản phẩm nhiều
khác biệt hơn so với thực tế=> Bán với markup cao hơn, tổn hao nguồn tài
nguyên xã hội
Ø Brand names:
- Advertising có mối liên hệ mật thiết đến sự tồn tại của brand names.
- Những công ty có brandnames thường chi nhiều hơn cho advertising và cũng tính giá cao
hơn.
- Arguments:
For: brand names=>motivation=>maintain the quality and the popularity of the
company.
Against: Eliminating of government on trade marks would reduce influence of
brand names=> lower price.
Quick Quiz
1. Which of the following conditions does NOT describe a firm in a monopolistically
competitive market?
a. It sells a product different from its competitors.
b. It takes its price as given by market conditions.
c. It maximizes profit both in the short run and in the long run.
d. It has the freedom to enter or exit in the long run.
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2. Which of the following markets best fits the definition of monopolistic competition?
a. wheat
b. tap water
c. crude oil
d. haircuts
3. A monopolistically competitive firm will increase its production if
a. marginal revenue is greater than marginal cost.
b. marginal revenue is greater than average total cost.
c. price is greater than marginal cost.
d. price is greater than average total cost
4. New firms will enter a monopolistically competitive market if
a. marginal revenue is greater than marginal cost.
b. marginal revenue is greater than average total cost.
c. price is greater than marginal cost.
d. price is greater than average total cost.
5. What is true of a monopolistically competitive market in long-run equilibrium?
a. Price is greater than marginal cost.
b. Price is equal to marginal revenue.
c. Firms make positive economic profits.
d. Firms produce at the minimum of average total cost.
6. If advertising makes consumers more loyal to particular brands, it could ________ the
elasticity of demand and ________ the markup of price over marginal cost.
a. increase, increase
b. increase, decrease
c. decrease, increase
d. decrease, decrease
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CHAPTER 17. OLIGOPOLY

Ø Market concentration:
- Concentration ratio: the percentage of the market’s total output supplied by a given
largest firms in the industry.
Higher concentration => less competition
Calculate: 4 firm concentration ratio => add together the biggest 4 firm’s market share.
5 firm concentration ratio => add together the biggest 5 firm’s market share.
Rule of thumb: an Oligopoly exists when the top five firms in the market account for
more than 60% of total market sales.
Example:

This chart shows the market shares for the UK grocery market in June 2020.
Calculate the 5 firm concentration ratio?
26.9% + 14.9% + 13.9% + 10.1% + 7.5% = 73.3%
Is this an oligopoly? How can we sure?
5 firms concentration ratio = 73.3%>60% => Oligopoly
Ø Duopoly: một oligopoly gồm 2 công ty
- Collusion: sự thống nhất, hiệp ước giữa các công ty trên thị trường về việc bán ra bao
nhiêu (Q) hay đặt giá bao nhiêu (P)
- Cartel: 1 nhóm công ty hành động thống nhất với nhau trở thành monopolies.
- Collude vs. Compete (self-interest)
Collude: Both firms would be better off it both stick to the cartel agreement
Self-interest: But each firm has incentive to renege on/violate the agreement.
ð It is difficult to oligopoly firms to form cartels and honor their agreements.
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Example:

P Q - Assume that there is a duopoly: A and B

- Each firm cost: FC =0, MC =10
- Agree to produce: Qa=Qb=30 => Q=60 => P=40
$0 140
Profit each firm = 40 x 30 – 10 x 30 = 900
- Firm B renege on the agreement and produce Qb=40 => Q=70 => P=35
5 130 Profit firm A= 35 x 30 – 10 x 30 = 750 => Profit is lower
Profit firm B = 40 x 35 – 10 x 40=1000 => Profit is higher
10 120 => Easy to renege
- Firm A also renege on the agreement and produce Qa=40 => Q=80 => P=30
Profit firm A = Profit firm B = 40 x 30 -10 x 40= 800
15 110 ð Both renege the agreement => Both decrease profits.

20 100

25 90

30 80

35 70

40 60

45 50
Ø The output & price effects:
- Output effects: P>MC => Increase Q => Increase profit.
- Price effects: Increase Q=> Decrease profit.
OE > PE=> Increase Q
OE < PE => Decrease Q
Ø The size of the Oligopoly:
- Increase firms=>P approaches MC=>Q approaches the socially efficient quantity =>
Look like competitive market
Ø Game or theory: the study of how people behave in strategic situations.
- Nash equilibrium: a situation in which economic participants interacting with one
another each choose their best strategy given the strategies that all the others have
chosen.
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- Dominant Strategy: a strategy that is best for a player in a game regardless of the
strategies chosen by the other players.
- Prisoners’ dilemma: a “game” between two captured criminals that illustrates why
cooperation is difficult even when it is mutually beneficial.
Example:
1.

Dominant
strategies

Nash Equilibrium

Dominant
strategies

- There are 2 dominant strategies and 1 nash equilibrium.

- Bob dù chọn lựa chọn nào cũng sẽ chọn Confess, dominant strategy của Bob là xanh lá
- Bill dù chọn lựa chọn nào cũng sẽ chọn Deny, dominant strategy của Bill là vàng
- Trường hợp cả hai cùng lựa chọn=> Confess là Nass Equilibrium khi đó cả hai đều nhận
3 năm tù.
- Nếu cả 2 đều chọn Deny thì mỗi người chỉ 2 năm tù, tại sao lại không chọn=> Bị self-
interest thao túng.
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2. Suppose there are two oligopoly firms. Each has 3 different plans to generate
different profits for the firm as follow. Find all Nash equilibrium and dominants
available!
B
Plan
1 2 3
1 50 40 100

50 40 70
2 70 30 70
A NE NE
70 50 80 DS
3 80 20 60
NE
70 30 40
There are 3 Nash Equilibrium and 1 Dominant Strategy.
Ø Why people sometimes cooperate:
- Nếu đối thủ bội ước trong 1 vòng, thì mình cũng bội ước trong tất cả các vòng sau.
- “Tit – for – tat”: đối thủ làm gì trong vòng này thì vòng sau mình làm y hệt.
Ø Three practices have controversies over antitrust policy:
- Resale price maintenance (“fair trade”): nhà sản xuất đặt ra giới hạn dưới P mà đại lý
có thể thu=> ngăn chặn giảm
- Predatory pricing: công ty giảm P để ngăn cản sự gia nhập của công ty mới hoặc khiến
đối thủ bị đẩy ra thị trường và sau đó thu về monopoly price.
- Tying: nhà sản xuất kết hợp hai sản phẩm chung với nhau và cùng bán với một mức P.

Quick Quiz
1. The key feature of an oligopolistic market is that
a. each firm produces a different product from other firms.
b. a single firm chooses a point on the market demand curve.
c. each firm takes the market price as given.
d. a small number of firms are acting strategically.
2. If an oligopolistic industry organizes itself as a cooperative cartel, it will produce a
quantity of output that is ________ the competitive level and ________ the monopoly level.
a. less than, more than
b. more than, less than
c. less than, equal to
d. equal to, more than
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3. If an oligopoly does not cooperate and each firm chooses its own quantity, the industry
will produce a quantity of output that is ________ the competitive level and ________ the
monopoly level.
a. less than, more than
b. more than, less than
c. less than, equal to
d. equal to, more than
4. As the number of firms in an oligopoly grows large, the industry approaches a level of
output that is ________ the competitive level and ________ the monopoly level.
a. less than, more than
b. more than, less than
c. less than, equal to
d. equal to, more than
5. The prisoners’ dilemma is a two-person game illustrating that
a. the cooperative outcome could be worse for both people than the Nash equilibrium.
b. even if the cooperative outcome is better than the Nash equilibrium for one person, it
might be worse for the other.
c. even if cooperation is better than the Nash equilibrium, each person might have an
incentive not to cooperate.
d. rational, self-interested individuals will naturally avoid the Nash equilibrium because it
is worse for both of them.
6. The antitrust laws aim to
a. facilitate cooperation among firms in oligopolistic industries.
b. encourage mergers to take advantage of economies of scale.
c. discourage firms from moving production facilities overseas.
d. prevent firms from acting in ways that reduce competition.
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4 TYPES OF MARKET STRUCTURES

Types of Competitive Monopolistic Oligopoly Monopoly

market competition
structure
No of firms Many Many Few large, single
interdependent
Type of Identical/ Slightly/ Identical or unique
products homogeneous differentiated differentiated
Substitute Perfect Many close Good No close
available substitutes substitutes differentiated substitutes
substitutes
Ease of Entry Very low/ very Low High Very high
easy
Demand Horizontal Downward Downward Downward
curve firm (P=MR=AR) sloping sloping sloping
faces (MR = D) (MR=D) (MR=D)
Pricing power None, price Little, decide Little to Significant
takers, only Q to influence significant, Decide Q & P
decide Q P in some decide Q & P
extent
Examples Farm, Food Clothes, Automobiles Electricity
apartments,
books, bottled
water, fast
food, night
club
Maximize P=MR=MC. P> MR=MC. P> MR=MC.
profit output AR=P
(long run,
short run, P,
MC, MR,
ATC)
Means to None Advertising Price and non – Price
raise profit price discrimination
competition,
collusion
Productive Achieved Not achieved, Not achieved Not achieved
and allocative but closer to
efficiencies efficiency
Entry in the Yes Yes No
long run
Earn Yes Yes Yes
Economic
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Profit in the
short run
Earn Yes No No
Economic
Profit in the
long run
Produces Yes No No
welfare
maximizing
level of
output?
Price No No Yes
discrimination

Chapter 21. THEORY OF CONSUMER CHOICE

Ø Budget constraints (chế ước ngân sách): limit on consumption bundle a customer can
afford.
ð Slope of the budget constraint = relative price of 2 goods.

∆*+*,- 012
- 𝑆𝑙𝑜𝑝𝑒 = ∆*-../ = 12
=5
- Relative price: 5 pepsi per pizza=> The opportunity cost of 1 pizza is 5 pepsi.
Ø Indifference curve: consumption bundles that give customer same level of satisfaction
(nằm trên cùng 1 đường sẽ có cùng satisfaction như nhau). Preferences/Consumers’
Wants
- 4 properties:
Higher IC is preferable than lower IC.
ICs are downward sloping.
ICs do not cross each other.
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ICs are bowed inward.

- Marginal Rate of Substitution: the rate at which consumer is willing to trade one good for
another => MRS decrease when the point move.

- 2 examples:
Perfect substitutes: two goods with straight – line indifference curves.
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Perfect complements: two goods with right-angle indifference curves.

Ø The optimal: represents the best combination of 2 goods available to consumers.

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- An increase in Income:
+ Normal goods: Increase Income=> Increase Qd

+ Inferior goods: Increase income => decrease Qd

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- An increase in Price:

+ Income effect & Substitution effect:

Good Income Effect Substitution Effect Total Effect
Pepsi Consumer is Pepsi is cheaper=> Increase
richer=> buy more buy more Pepsi
Pepsi
Pizza Consumer is Pizza is more Ambiguous
richer=>buy more expensive=> buy
Pizza less Pizza
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Ø Application 1: Giffen Goods

Ø Application 2: Wages and Labor Supply

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Ø Application 3: Interest rates and savings

Quick Quiz
1. Emilio buys pizza for $10 and soda for $2. He has income of $100. His budget
constraint will experience a parallel outward shift if which of the following events
occur?
a. The price of pizza falls to $5, the price of soda falls to $1, and his income falls to $50.
b. The price of pizza rises to $20, the price of soda rises to $4, and his income remain the same.
c. The price of pizza falls to $8, the price of soda falls to $1, and his income rises to $120.
d. The price of pizza rises to $20, the price of soda rises to $4, and his income rises to $400.
2. At any point on an indifference curve, the slope of the curve measures the
consumer’s
a. income.
b. willingness to trade one good for the other.
c. perception of the two goods as substitutes or complements.
d. elasticity of demand.
3. Matthew and Susan are both optimizing consumers in the markets for shirts and
hats, where they pay $100 for a shirt and $50 for a hat. Matthew buys 4 shirts and
16 hats, while Susan buys 6 shirts and 12 hats. From this information, we can infer
that Matthew’s marginal rate of substitution is _____ hats per shirt, while Susan’s is
_____.
a. 2, 1
b. 2, 2
c. 4, 1
d. 4, 2
4. Darius buys only lobster and chicken. Lobster is a normal good, while chicken is
an inferior good. When the price of lobster rises, Darius buys
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a. less of both goods.

b. more lobster and less chicken.
c. less lobster and more chicken.
d. less lobster, but the impact on chicken is ambiguous.
5. If the price of pasta increases and a consumer buys more pasta, we can infer that
a. pasta is a normal good and the income effect is greater than the substitution effect.
b. pasta is a normal good and the substitution effect is greater than the income effect.
c. pasta is an inferior good and the income effect is greater than the substitution effect.
d. pasta is an inferior good and the substitution effect is greater than the income effect.
6. The labor-supply curve slopes upward if
a. leisure is a normal good.
b. consumption is a normal good.
c. the income effect on leisure is greater than the substitution effect.
d. the substitution effect on leisure is greater than the income effect.

GOOD LUCK!