Econ 100A Final exam study guide, page 1 of 3

Final exam study guide

This guide is intended to give you an outline of all the main topics we’ve covered since just
before midterm 2. (Specifically, lectures 17 through 25.)

The final is cumulative, so the study guides from the first two sections of the semester will also
be covered on the final.

Don’t forget that the solutions to the problem sets are required reading for the class.

Industry supply
 The definition of short-run and long-run for the firm and the industry as a whole, and
how they can overlap.
 Aggregating firm supply to get short-run industry supply. How to make an educated
guess about the slope of the supply curve based on common sense and real-world
knowledge of returns to scale.
 Long run equilibrium and the long-run supply curve with identical firms. Why the
assumption of free entry and exit is important. How profit arises in the short run, and
how the entry and exit decisions of firms drive profit out of the industry and drive price
down to minimum average cost.
 Opportunity costs and the difference between accounting and economic profit. What we
mean when we say firms are sometimes earning zero profit even though their owners and
investors are making a good return on their investment.
 Long-run equilibrium and long-run supply when firms are heterogeneous. Long-run
producer surplus (economic rent) and what is necessary for economic rent to exist. Other
causes of economic rent.
Monopoly.
 Underproduction: how to solve for the equilibrium output and price of a profit-
maximizing monopoly. The profit maximizing condition for a monopoly.
 The monopolists profit, deadweight loss, and markup pricing.
 Barriers to entry. Why monopolies arise. When they are desirable, and why. Particular
focus on natural monopoly. The role of fixed costs and diminishing average cost in
natural monopoly.
 Regulation and subsidy of profitable versus un-profitable natural monopolies. What is
the socially optimal quantity and price and what options does government have for
attempting to get closer to optimality? When is a natural monopoly profitable versus
unprofitable? When is an unprofitable natural monopoly socially desirable? When is a
subsidy appropriate or necessary?
Econ 100A Final exam study guide, page 2 of 3

Monopoly pricing.
 Definition of market power. Conditions necessary for price discrimination to be possible.
 Types of price discrimination: what the definitions mean, when each type applies in the
real world, and what different mechanisms firms can use to achieve each type of price
discrimination.
 How to solve for the profit maximizing equilibrium in third-degree price discrimination.
 How firms achieve self-selection in second-degree price discrimination, and how that
increases the firm’s profits.
Game theory.
 Definition of strategic interaction, and why we need game theory to model it.
 Definition of a game: players, strategies, payoffs. Definition of simultaneous- versus
sequential-moves games.
 Best-responses and best-response functions (or curves): how to compute using payoff
matrices, game trees, or utility/profit functions.
 Subgames, and how and why strategies are defined as complete contingent plans in
sequential-moves games.
 Nash equilibrium and mutual best response.
o Definition of N.E. and how to compute them.
o Strengths and weakness of N.E., especially as a tool for predicting outcomes.
 Subgame-perfect equilibrium.
o Definition (N.E. in all subgames).
o How to solve using backwards induction, either with or without a game tree (e.g.
of without: Stackelberg oligopoly).
 Prisoner’s dilemma
o Conditions that make a situation a prisoner’s dilemma.
o Nash equilibrium and socially-optimal outcome.
o Three ways to achieve mutual cooperation.
Oligopoly.
 Three main models: simultaneous quantity (Cournot), simultaneous price (Bertrand),
sequential quantity (quantity leader, aka Stackelberg).
o Best-response functions, and how to solve for equilibrium in each model.
o Efficiency comparisons with perfect competition and pure monopoly.
o When each of the different models is appropriate for analyzing real-world
industries.
o How to solve for Bertrand equilibrium using an exhaustive list of cases.
 Why Bertrand competition leads to social optimality with only two firms.
Econ 100A Final exam study guide, page 3 of 3

Public goods.
 Definition and examples of four types of externalities, and how public goods are a special
case of positive consumption externalities.
 Conditions that define a pure public good: non-rivalry and non-excludability.
 Social optimality:
o Computing marginal social benefit through vertical summation of WTP curves,
and how to solve for the socially optimal quantity of a public good.
o Determining total willingness to pay for each individual, and determining whether
there is a payment scheme that makes social optimality possible.
 Free-market outcomes:
o How to solve for free-market equilibrium in three cases: no one can afford the
public good, one person can afford the public good, more than one person can
afford the public good.
o How public goods can be a prisoner’s dilemma.
o The definition of the free-rider problem and how it arises in free-market outcomes
for public goods, even when Nash equilibrium is for no one to contribute to the
public good.
 Mechanisms for determining how much of a public good to provide:
o Voting, and why it fails. Intransitivity and agenda manipulation. The problem of
intensity of preferences, how to determine if a public good will pass a majority
vote, and whether the voting outcome will be socially optimal.
o Eliciting willingness to pay. Why individuals have an incentive to misrepresent
their willingness to pay, and how the Vickrey-Clarke-Groves mechanism
overcomes that incentive through incentive compatibility.
Externalities.
 Will not be on the exam.
Adverse selection.
 Definition of asymmetric information and hidden type.
 Why “unravelling” happens in markets with hidden-type asymmetric information.
 How risk aversion reduces unravelling.
 How partial coverage reduces the inefficiency caused by adverse selection.
 How single payer and the Affordable Care Act solve the problem of adverse selection in
health insurance markets.