For consumer questions:

o Coeff. in demand function gives first part of elasticity of demand expression

o Elasticity: used when given percentage changes in prices
o For MUx, differentiate utility function wrt. X and vice versa (do the same to find
marginal product from production function)

Firms  identify if it is perfect competition or monopoly first!!

For Perfect Competition:

o Use P = MC to relate MC to P to ultimately find supply curve function

Questions relating to cost: for perfect and imperfect

o For total cost: Look at which part of cost function given is fixed, which part is variable
o For cost minimization: MPx/MPy = Px/Py (same for utility of consumers)
o For SR cost functions/ when losses incurred and need to determine if firm needs to
shut down: look at variable part of cost function first, then find minAVC, then use
P>= minAVC (if fixed costs can be recouped, then use minAC instead)

For monopoly/ oligopolies:

o MR = MC
o 1st degree PD: sell until P = MC, state assumptions before calculations
o 2nd degree PD: equate MR (derive from demand function) = MC for each group

o For cournot equilibrium:

1. Set firm 1’s qty as fixed  treat it as a fixed factor in total demand function.
2. Then find TR by taking price (inverse demand function) x qty of firm 2
3. Find MR, then equate MR = MC as usual such that Q2 is expressed as function of
Q1 (to produce firm 2’s reaction function)
4. Then substitute this into firm 1’s reaction function, which is identical  find Q1
(which is also = Q2 in cournot)

o For Stackelberg oligopoly:

1. Steps 1-4 of cournot equilibrium
2. Substitute into price equation (inverse demand function)  obtain function
expressed only in terms of Q1 (qty of leader firm)
3. Find MR, use MR = MC  obtain Q1

o For multi-plant decisions: Given demand function and MC functions,

1. Make qty the subject of formula in MC functions, change MC1/2 to MCt since
(MC1 = MC2 = MCt)
2. Since total qty = Q1 + Q2, equate two quantity functions derived from MC
functions to find MCt
3. Equate MCt to MR (derive from market demand function) to find Qt
For revenue maximization:
o Given firm’s demand function, can use gradient x (Px/Qx) to find elasticity  since
revenue maximized at unitary elasticity (E = 1): can find price/ qty ratio  substitute
ratio into demand function
o OR differentiate TR function to find max revenue when dTR/dQ = 0

Discount vs Buying and getting for free:

o Find benefit of each pair/ package of goods  compare it with cost of buying that
package
o Equilibrium quantity is when benefit of buying that package = cost of it
o Consumer surplus is the benefit – cost

To explain entry/ exit of firms:

o Profit/ loss  entry/ exit  supply curve shift rightward/ leftward  price falls/
increases + output of each firm reduced/ increases  long run equilibrium: zero
profit

Game Theory:
o Why equilibrium with highest aggregate payoff cannot be sustained: other player
has incentive to deviate

o To find payoffs from each strategy profile  find proportion (in decimal, out of 1) for
each party
o To explain how one strategy is dominated by the other: eg. Compare store 1’s payoff
by choosing spot 1 against payoff of spot 2, under each possible action of store 2
 show that that strategy results in worse payoffs regardless
o For inequalities that must hold if it is a dominant strategy equilibrium: look at the
strategy you would play given each strategy of rival
 equilibrium looks at both firms, but if we just look at one firm, its dominant
strategy is one that remains the same regardless of opponent’s decision (all circles
on one row/ column of table)
o For inequalities that must be satisfied if it is a nash equilibrium: given the strategy of
the rival, which strategies coincide

o To calculate current gain: net benefit of playing strategy with more payoff against
other strategy in period 1
o To calculate future gain: net benefit of playing cooperation strategy compared to the
outcome if cooperation is not played in period 2