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ect high inflation, and this also shifted the short-run Phillips curve up. It took a sustained and costly effort during the 1980s to get inflation back down. The result, however, was that expected inflation was very low by the late 1990s, allowing actual inflation to be low even with low rates of unemployment. 1979 197...
better indicator of underlying in- flation trends than the overall CPI. By this measure, inflation fell from about 12% at the end of the 1970s to about 4% by the mid - 1980s. How was this disinflation achieved? At great cost. Beginning in late 1979, the Federal Reserve imposed strongly contractionary monetary policies...
n 1933 and ending when World War II brought a full economic recovery, the U.S. economy was either close to or up against the zero bound. After World War II, when inflation became the norm around the world, the zero bound problem largely vanished as the public came to expect inflation rather than deflation. However, the...
there was no widely accepted theory of the business cycle, economists gave conflicting and, we now believe, often harmful advice. Some believed that only a huge change in the economic system—such as having the government take over much of private industry and replace markets with a command economy—could end the slump....
situation in which monetary policy is ineffective because the interest rate is down against the zero bound. In the 1930s, when Keynes wrote, interest rates were, in fact, very close to 0%. (The term liquidity trap was first introduced by the British economist John Hicks in a 1937 paper, “Mr. Keynes and the Classics: A ...
ocity began moving erratically, undermining the case for traditional monetarism. As a result, traditional monetarism fell out of favor. Source: Bureau of Economic Analysis; Federal Reserve Bank of St. Louis. Velocity of M1 12 10 8 6 4 Until 1980, velocity followed a smooth trend. After 1980, velocity changed erraticall...
”: if they set a price a bit too high, they’ll lose some sales but make more profit on each sale; if they set the price too low, they’ll reduce the profit per sale but sell more. As a result, even small costs to changing prices can lead to substantial price stickiness and make the economy as a whole behave in a Keynesi...
netary policy, can shift the aggregate demand curve. Most macroeconomists also agree that the government should not seek to balance the budget regardless of the state of the economy: they agree that the role of the budget as an automatic stabilizer helps keep the economy on an even keel. Can Monetary and/or Fiscal Poli...
all to earth—it may be difficult for monetary and fiscal policy to offset the effects on aggregate demand. After having seen the Japanese economy struggle for years with deflation in the aftermath of the collapse of its bubble economy, proponents of this view argue that the central bank should act to rein in irrational...
l changes in the aggregate price level even in the short run. 8. Governments sometimes print money in order to finance budget deficits. When they do, they impose an inflation tax, generating tax revenue equal to the inflation rate times the money supply, on those who hold money. Revenue from the real inflation tax, the...
diagram. 8. In the following examples, would the classical model of the price level be relevant? a. There is a great deal of unemployment in the economy and no history of inflation. b. The economy has just experienced five years of hyperinflation. c. Although the economy experienced inflation in the 10% to 20% range th...
are now more people to share a given amount of real GDP. An increase in real GDP that only matches an increase in population leaves the average standard of living unchanged. Although we learned that growth in real GDP per capita should not be a policy goal in and of itself, it does serve as a very useful summary measur...
were selling much more merchandise per worker. And why did productivity surge in retailing in the United States? “The reason can be explained in just two syllables: Walmart,” wrote McKinsey. Walmart has been a pioneer in using modern technology to improve productivity. For example, it was one of the first companies to ...
xplain. If growth continues at the rates shown in Figure 37.3, real GDP per capita for which of the seven countries will at least double over the next 10 years? Explain. c. 374 . Increases in real GDP per capita result mostly from changes in what variable? Define that variable. What other factor could also lead to incr...
ts of physical and human capital have been taken into account. For example, let’s imagine that there was no increase in human capital per worker so that we can focus on changes in physical capital and in technology. In Figure 38.2, the lower curve shows the same hypothetical relationship between physical capital per wo...
e predicted, would take off when people really changed their way of doing business to take advantage of the new technology—such as replacing letters and phone calls with e-mail. Sure enough, productivity growth accelerated dramatically in the second half of the 1990s. And, a lot of that may have been due to the discove...
figure illustrates this point using data for regions rather than individual countries (other than the United States). In 1955, East Asia and Africa were both very poor regions. Over the next 53 years, the East Asian regional economy grew quickly, as the convergence hypothesis would have predicted, but the African regi...
ore rapidly than others, through high rates of investment spending. In the 1960s, Japan was the fastest -growing major economy; it also spent a much higher share of its GDP on investment goods than other major economies. Today, China is the fastest -growing major economy, and it similarly spends a very large share of i...
at enforce those laws, and a stable political system that maintains those institutions. The law must say that your property is really yours so that someone else can’t take it away. The courts and the police must be honest so that they can’t be bribed to ignore the law. And the political system must be stable so that th...
is. Oil consumption (thousands of barrels per day) 25,000 20,000 15,000 10,000 5,000 Oil consumption Real GDP Real GDP per capita (2005 dollars) $45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 1949 1960 1970 1980 1990 2000 2008 Year however, that other things aren’t necessarily equal: countries can and d...
African countries is for wealthier countries to provide more funds for basic infrastructure. Others think this policy will have no long -run Tackle the Test: Multiple-Choice Questions effect unless African countries have the financial and political means to maintain this infrastructure. What policies would you suggest?...
roduction. A loss in the value of physical capital due to wear, age, or obsolescence is called depreciation. If Kyland were to produce at point D year after year, it would soon find its stock of physical Depreciation occurs when the value of an asset is reduced by wear, age, or obsolescence. f i g u r e 40.3 The Trade-...
production of investment goods is represented by a movement from point . to point f. Producing at which efficient point this year would lead to the most economic growth next year? S e c t i o n 7 Review Summary 1. Economic growth is a sustained increase in the productive capacity of an economy and can be measured as ch...
shows combinations of physical capital per worker and output per worker for both methods, assuming that human capital per worker is fixed. Method 1 Method 2 Physical capital per worker Real GDP per worker Physical capital per worker Real GDP per worker 0 50 100 150 200 250 300 350 400 450 500 0.00 35.36 50.00 61.24 70....
tely. So they put the extra in the bank. 410 Tr 41.1 The Costas’ Financial Year Sources of cash Uses of cash Purchases or sales of goods and services Artichoke sales: $100,000 Farm operation and living expenses: $110,000 Interest payments Loans and deposits Interest received on bank account: $500 Funds received from ne...
e same time, money flows from the United States to the rest of the world as payment for U.S. imports of goods and services, as payment for the use of foreign -owned factors of production, and as transfer payments. These flows, indicated by the upper green arrow, are the negative components of the U.S. current account. ...
uantity of loanable funds Interest rate 4% 0 SB EB DB Quantity of loanable funds Capital outﬂow from Britain British lenders lend to borrowers in the United States, leading to equalization of interest rates at 4% in both countries. At that rate, American borrowing exceeds American lending; the difference is made up by ...
ich he will keep in the United States so he can travel around America. Tackle the Test: Multiple-Choice Questions 1. The current account includes which of the following? I. payments for goods and services II. transfer payments III. factor income a. I only b. II only c. III only d. I and II only I, II, and III e. 2. The...
S. dollars demanded falls as the number of euros needed to buy a U.S. dollar rises. If the U.S. dollar falls against the euro (the dollar depreciates), American products will become relatively cheaper for Europeans. Europeans will respond by buying more from the United States and acquiring more dollars in the foreign e...
on the quantity of goods and services imported by Mexico from the United States. To see why, consider again the example of a hotel room. Suppose that this room initially costs 1,000 pesos per night, which is $100 at an exchange rate of 10 pesos per dollar. After both Mexican prices and the number of pesos per dollar r...
urrent nominal exchange rate is 10 pesos per U.S. dollar. Over the next five years, the cost of that market basket rises to $120 in the United States and to 1,200 pesos in Mexico, although the nominal exchange rate remains at 10 pesos per U.S. dollar. Calculate the following: a. the real exchange rate now and five year...
rting their currency through exchange market intervention. As we’ll see in a moment, governments that keep the value of their currency down through exchange market intervention must buy foreign assets. First, however, let’s talk about the other ways governments fix exchange rates. A second way for the Genovian governme...
urrency. c. buys the foreign currency. d. lowers domestic interest rates. e. removes foreign exchange controls. 5. Which of the following is a benefit of a fixed exchange rate regime? a. certainty about the value of domestic currency b. commitment to inflationary policies c. no need for foreign exchange reserves d. all...
ill receive a lower rate of return on their loans. As a result, they have less need to exchange U.S. dollars for genos, so the demand for genos falls. At the same time, Genovians have more incentive to move funds abroad because the rate of return on loans at home has fallen, making investments outside the country more ...
the United States reduces the incentive to invest in the United States and increases the incentive to invest in Australia. 1 point: The supply of U.S. dollars increases. 1 point: The demand for U.S. dollars decreases. 1 point: The exchange rate falls (the U.S. dollar depreciates). 1 point: The lower exchange rate leads...
Interest rates Investment spending Demand Curve Income Supply and Demand Supply Curve Input prices Prices of substitutes and complements Prices of substitutes and complements in production Tastes Consumer expectations Number of consumers Demand Curve Investment opportunities Government borrowing Demand Curve Aggregate ...
y, long-run aggregate supply, equilibrium output, and aggregate price level. b. Assume that energy prices increase in the United States. Show the effects of this increase on the equilibrium in your graph from part a. c. According to your graph, how does the increase in energy prices affect unemployment and inflation in...
ey were in 1980? 3. In the economy of Scottopia in 2008, exports equaled $400 billion of goods and $300 billion of services, imports equaled $500 billion of goods and $350 billion of services, and the rest of the world purchased $250 billion of Scottopia’s assets. What was the merchandise trade balance for Scottopia? W...
supply. We will look at how the price and the quantity bought and sold in a market affect consumer, producer, and overall welfare. And we will consider how consumers make choices to maximize their individual utility, the term economists use to describe “satisfaction.” Because consumers are relatively unresponsive to th...
); at a price of $21, the quantity demanded would fall to 9.9 million vaccinations per year (point B). Figure 46.1, then, tells us the change in the quantity demanded for a particular change in the price. But how can we turn this into a measure of price responsiveness? The answer is to calculate the price elasticity of...
r income, Delia moves to a smaller apartment. Assume that rental housing is a normal good. c. The cost of a semester-long meal ticket at the student cafeteria rises, representing a significant increase in living costs. As a result, many students have less money to spend on weekend meals at restaurants and eat in the ca...
price elasticity of demand, which would determine the resulting drop in use 467 f i g u r e 47 .2 Unit-Elastic Demand, Inelastic Demand, and Elastic Demand (a) Unit-Elastic Demand: Price Elasticity of Demand = 1 (b) Inelastic Demand: Price Elasticity of Demand = 0.5 Price of crossing A 20% increase in the price . . . $...
icity of Demand Changes Along the Demand Curve Price $10 Total revenue $25 24 21 16 9 0 Elastic Unit-elastic Inelastic D 10 9 Quantity 10 9 Quantity Demand is elastic: a higher price reduces total revenue. Demand is inelastic: a higher price increases total revenue. Demand Schedule and Total Revenue for a Linear Demand...
nd a vertical line labeled “Demand” (or “D”) 1 point: Zero 1 point: Infinite or undefined 1 point: Necessity 1 point: Since you have to have a necessity (such as a life-saving medicine), you do not change the quantity you purchase when price changes. 474 Module 48 Other Elasticities Other Elasticities We stated earlier...
sticity of Supply In the wake of the flu vaccine shortfall of 2004, attempts by vaccine distributors to drive up the price of vaccines would have been much less effective if a higher price had induced a large increase in the output of flu vaccines by flu vaccine manufacturers other than Chiron. In fact, if the rise in ...
emanded rises when income rises, but not as rapidly as income. Quantity demanded rises when income rises, and more rapidly than income. Price elasticity of supply = % change in quantity supplied % change in price Perfectly inelastic supply 0 Perfectly elastic supply ∞ Greater than 0, less than ∞ Price has no effect on ...
ee shortly that for the analysis of consumer surplus it doesn’t matter whether the demand curve is step-shaped, as in this figure, or whether there are many consumers, making the curve smooth. A consumer’s willingness to pay for a good is the maximum price at which he or she would buy that good 483 f i g u r e 49.1 The...
book at $30 but does buy one at $20. He gains $5—the difference between his willingness to pay of $25 and the new price of $20. So the light blue area represents a further $5 gain in consumer surplus. The total increase in consumer surplus is the sum of the shaded areas, $35. Likewise, a rise in price from $20 to $30 ...
cer surpluses of sellers to calculate the total producer surplus, the total net gain to all sellers in the market. Economists use the term producer surplus to refer to either total or individual producer surplus. Table 49.2 shows the net gain to each of the students who would sell a used book at a price of $30: $25 for...
antity a. Calculate consumer surplus. b. Calculate producer surplus. c. If supply increases, what will happen to consumer surplus? Explain. d. If demand decreases, what will happen to producer surplus? Explain. 494 Module 50 Efficiency and Deadweight Loss Consumer Surplus, Producer Surplus, and Efficiency Markets are a...
prevented A X E Y B S Loss in total surplus if the transaction between Yvonne and Bob is forced D 0 1,000 Quantity of books Finally, the committee might try to increase sales by forcing Yvonne, who would not have sold her book in the market equilibrium, to sell it to someone like Bob, who would not have bought a book i...
rs who would have rented hotel rooms—those willing to pay $80 but not $100 per night—are discouraged from renting rooms. Correspondingly, 5,000 rooms that would have been made available by hotel owners when they receive $80 are not offered when they receive only $60. Like a quota on sales as discussed in Module 9, this...
ly on producers. A real-world example is a tax on purchases of existing houses. In many American towns, house prices in desirable locations have risen as well-off outsiders have moved in and purchased homes from the less well-off original occupants, a phenomenon called gentrification. Some of these towns have imposed t...
re the deadweight loss produced by types of taxes other than excise taxes. They are also used to measure the deadweight loss produced by monopoly, another kind of market distortion. And deadweight-loss triangles are often used to evaluate the benefits and costs of public policies besides taxation— such as whether to im...
sense to ask that question? Luckily, we don’t need to make comparisons between your feelings and mine. The analysis of consumer behavior that follows requires only the assumption that individuals try to maximize some personal measure of the satisfaction gained from consumption. That measure of satisfaction is known as ...
e set of all of Sammy’s affordable consumption bundles his consumption possibilities. In general, whether or not a particular consumption bundle is included in a consumer’s consumption possibilities depends on the consumer’s income and the prices of goods and services. Figure 51.2 shows Sammy’s consumption possibilitie...
dditional utility Sammy gets from spending an additional dollar on either good. Marginal Utility per Dollar We’ve already introduced the concept of marginal utility, the additional utility a consumer gets from consuming one more unit of a good or service; now let’s see how this concept can be used to derive the related...
-Choice Questions 1. Generally, each successive unit of a good consumed will cause 4. A consumer is spending all of her income and receiving 100 utils from the last unit of good A and 80 utils from the last unit of good B. If the price of good A is $2 and the price of good B is $1, to maximize total utility the consume...
the form of deadweight loss because they discourage some mutually beneficial transactions. Taxes also impose administrative costs: resources used to collect the tax, to pay it (over and above the amount of the tax), and to evade it. 21. An excise tax generates revenue for the government but lowers total surplus. The lo...
it. 9. Determine the amount of producer surplus generated in each of the following situations. a. Gordon lists his old Lionel electric trains on eBay. He sets a minimum acceptable price, known as his reserve price, of $75. After five days of bidding, the final high bid is exactly $75. He accepts the bid. b. So-Hee adve...
t module we will look at how firms go about maximizing their profit. In general, a firm’s profit equals its total revenue—which is equal to the price of the output times the quantity sold, or P × Q—minus the cost of all the inputs used to produce its output, its total cost. That is, Profit = Total Revenue − Total Cost ...
nt point is that the pressure is intense even if the farmer owns the land because the land is a form of capital used to run the business. Maintaining the land as a farm instead of selling it to a developer constitutes a large implicit cost of capital. A fact provided by the U.S. Department of Agriculture (USDA) helps u...
r the effect on a producer’s profit of increasing output by one unit. The marginal benefit of that unit is the additional revenue generated by selling it; this measure has a name—it is called the marginal revenue of that output. The general formula for marginal revenue is: (53-3) Marginal revenue = Change in total reve...
oint: The optimal output rule states that profit is maximized when MC = MR. Here, MC never exactly equals MR. When this occurs, the firm should produce the largest quantity at which MR exceeds MC. At a quantity of 5, MC = $16 and MR = $18. For the sixth unit, MC = $22 and MR = $18, and because MC > MR, the sixth unit w...
out what happens as George and Martha add more and more workers without increasing the number of acres. As the number of workers increases, the land is farmed more intensively and the number of bushels increases. But each additional worker is working with a smaller share of the 10 acres—the fixed input—than the previou...
they know the relationship between inputs of labor and land and output of wheat. But if they want to maximize their profits, they need to translate this knowledge into information about the relationship between the quantity of output and cost. Let’s see how they can do this. To translate information about a firm’s pro...
for, the additional cost per additional unit of output also rises. Recall that the flattening of the total product curve is also due to diminishing returns: if the quantities of other inputs are fixed, the marginal product of an input falls as more of that input is used. The flattening of the total product curve as out...
cost, producing that extra unit lowers average total cost. This is shown in Figure 55.5 by the movement from A1 to A2. In this case, the marginal cost of producing The minimum-cost output is the quantity of output at which average total cost is lowest—it corresponds to the bottom of the U-shaped average total cost cur...
more productive: fewer workers will be needed to produce any given output, so variable cost for any given output level will be reduced. The table in Figure 56.1 on the next page shows how acquiring an additional machine affects costs. In our original example, we assumed that Selena’s Gourmet Salsas had a fixed cost of...
pany that has to increase output suddenly to meet a surge in demand will typically find that in the short run its average total cost rises sharply because it is hard to get extra production out of existing facilities. But given time to build new factories or add machinery, short-run average total cost falls. Returns to...
three possible combinations of fixed cost and average variable cost. Average variable cost is constant in this example. (It does not vary with the quantity of output produced.) Fixed cost Choice $8,000 1 12,000 2 24,000 3 Average variable cost $1.00 0.75 0.25 a. For each of the three choices, calculate the average tota...
Under what circumstances will all firms be price-takers? As we’ll discover next, there are two necessary conditions for a perfectly competitive industry and a third condition is often present as well. Two Necessary Conditions for Perfect Competition The markets for major grains, such as wheat and corn, are perfectly co...
ut smaller ones. For the same reason, established firms have a cost advantage over any potential entrant—a potent barrier to entry. So economies of scale can both give rise to and sustain a monopoly. A monopoly created and sustained by economies of scale is called a natural monopoly. The defining characteristic of a na...
the most commonly used. A higher concentration ratio signals a market is more concentrated and thus is more likely to be an oligopoly. Another measure of market concentration is the HerfindahlHirschman index, or HHI. The HHI for an industry is the square of each firm’s share of market sales summed over the firms in the...
re implicit costs; they involve no outlay of money but represent the inflows of cash that are forgone. Both explicit and implicit costs should be taken into account when making decisions. Firms use capital and their owners’ time, so firms should base decisions on economic profit, which takes into account implicit costs...
a. You are offered a part-time job in a restaurant where you can eat for free each evening. Your parents say that you should eat dinner in the cafeteria anyway, since you have already paid for those meals. Are your parents right? Explain why or why not. b. You are offered a part-time job in a different restaurant wher...
duct of each worker. What prin- ciple explains why the marginal product per worker declines as the number of workers employed increases? b. Calculate the marginal cost of each level of output. What principle explains why the marginal cost per floral arrangement increases as the number of arrangements increases? 15. You...
58.1 The Price-Taking Firm’s ProfitMaximizing Quantity of Output At the profit-maximizing quantity of output, the market price is equal to marginal cost. It is located at the point where the marginal cost curve crosses the marginal revenue curve, which is a horizontal line at the market price and represents the firm’s...
It also shows how profits are depicted graphically. Each panel shows the marginal cost curve, MC, and the short-run average total cost curve, ATC. Average total cost is minimized at point C. Panel (a) shows the case in which the market price of tomatoes is $18 per bushel. Panel (b) shows the case in which the market p...
ut it will no longer incur any variable cost. This means that the minimum average variable cost determines the shut-down price, the price at which the firm ceases production in the short run. When price is greater than minimum average variable cost, however, the firm should produce in the short run. In this case, the f...
irm’s profitability and production conditions. It also relates them to entry into and exit from the industry in the long run. Now that we understand how a perfectly competitive firm makes its decisions, we can go on to look at the supply curve for a perfectly competitive market and the long-run equilibrium in perfect c...
bushels, corresponding to 100 farms × 5 bushels per farm. The result is the short-run industry supply curve, shown as S in Figure 60.1. This curve shows the quantity that producers will supply at each price, taking the number of farms as given. f i g u r e 60.1 The Short-Run Market Equilibrium The short-run industry s...
ly curve shifts rightward, from S1 to S2. There is a new equilibrium at point ZMKT , at a lower price of $14 and higher industry output of QZ . An existing firm responds by moving from Y to Z in panel (c), returning to its initial output level and zero economic profit. Production by new entrants accounts for the total ...
ompetition? a. a negative market return. b. a positive profit. c. a loss. d. a normal profit. e. excess profit. 2. With perfect competition, efficiency is generally attained in a. the short run but not the long run. b. the long run but not the short run. c. both the short run and the long run. d. neither the short run ...
MR Quantity of diamonds (b) Total Revenue Quantity effect dominates price effect. Price effect dominates quantity effect. 10 TR 20 Quantity of diamonds power means that the firm faces a downward-sloping demand curve. As a result, there will always be a price effect from an increase in output for a firm with market pow...
e calculated profit in Equation 59-1, profit is equal to the difference between total revenue and total cost. So we have (61-4) Profit = TR − TC = (PM × Q M) − (ATCM × QM) = (PM − ATCM) × Q M. Profit is equal to the area of the shaded rectangle in Figure 61.4, with a height of PM − ATCM and a width of QM. We learned th...
ducers have lower average total costs than small producers, should be broken up, because this would raise average total cost. For example, a town government that tried to prevent a single company from dominating local gas supply—which, as we’ve discussed, is almost surely a natural monopoly—would raise the cost of prov...
Customers feel they are being overcharged, but the cable company claims it must charge prices that let it recover the costs of laying cable. government approval to merge. Other airlines wish to fly to Alaska but need government-allocated landing slots to do so 621 2. True or false? Explain your answer. 3. Suppose a mon...
ess travelers. As long as different groups of customers respond differently to the price, a monopolist will find that it can capture more consumer surplus and increase its profit by charging them different prices. Price Discrimination and Elasticity A more realistic description of the demand that airlines face would no...
e and a low price, some consumers who were formerly priced out of the market will be able to purchase the good. The price discrimination increases efficiency because more 628 of the units for which the willingness to pay (as indicated by the height of the demand curve) exceeds the marginal cost are produced and sold. C...
our answers. for $20,000 a month. Those are his fixed costs. His variable costs per month are given in the accompanying table. a. aspirin b. Alicia Keys concerts c. SUVs 2. Kate’s Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate’s machinery costs $100 per day and is the onl...
only if the price is just equal to, or lower than, her willingness to pay. Raquel’s willingness to pay is $400; Jackie’s, $300; Joan’s, $200; Mia’s, $100; and Sophia’s, $0. De Beers’s marginal cost per diamond is $100. This leads to the demand schedule for diamonds shown in the accompanying table. Price of diamond $50...
han find the point where the MC and MR curves intersect! Understanding Oligopoly How much will a firm produce? Up to this point, we have always answered: the quantity that maximizes its profit. When a firm is a perfect competitor or a monopolist, we can assume that the firm will use its cost curves to determine its pro...
cost, as under perfect competition. Another French economist, Augustin Cournot, focused instead on quantity competition, which had oligopolists choosing quantities and charging as much as possible for those quantities, rather than choosing prices and selling as much as possible at those prices. According to the Courno...
fully how oligopolists behave, economists, along with mathematicians, developed the area of study of such games, known as game theory. It has many applications, not just to economics but also to military strategy, politics, and other social sciences. Let’s see how game theory helps us understand oligopoly. The Prisoner...
ey had some way of enforcing cooperative behavior: if Thelma and Louise had both sworn to a code of silence, or if the two firms had signed an enforceable agreement not to produce more than 30 million pounds of lysine. But we know that in the United States an agreement setting the output levels of two oligopolists isn’...
ch set of actions will affect the utility of the players (the numbers represent utils gained or lost). Build missile Nikita Don’t build missile –10 –20 Build missile Margaret Don’t build missile –10 –20 8 8 0 a. Identify any Nash equilibria that exist in this game, and explain why they do or do not exist. b. Which set ...
a race to the courthouse” as each conspirator seeks to be the first to come clean. Life has gotten much tougher over the past few years if you want to operate a cartel. So what’s an oligopolist to do? Tacit Collusion and Price Wars If real life were as simple as our lysine story, it probably wouldn’t be necessary for t...
A Cars line up for gasoline in 1973 after the U.S. government imposed price controls. first; and the other companies would adopt similar prices. This pattern of behavior, in which one company tacitly sets prices for the industry as a whole, is known as price leadership. Interestingly, firms that have a tacit agreement...
ndustry. To analyze monopolistic competition, we focus first on the short run and then on how an industry moves from the short run to the long run. Panels (a) and (b) of Figure 67.1 show two possible situations that a typical firm in a monopolistically competitive industry might face in the short run. In each case, the...

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