Competition III

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Session Overview

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Models are easy to construct, but they may not always exactly match reality. While we assume that firms maximize profits, this may not always be true, and in this lecture we start to learn why. We also start to think about how we can measure the welfare that consumers gain from participating in a market.

Stocks and stock options are commonly used to overcome the agency problem. Image courtesy of Lance Ball on Flickr.

Keywords: Agency problem; corporations; stock options; normative economics; welfare economics; consumer surplus.

Session Activities

Readings

Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:

  • [Perloff] Chapter 8, "Competitive Firms and Markets." (optional)

Lecture Videos

Resources

Check Yourself

Concept Quiz

This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.

 
Question 1 of 4
Concept test 1
Which of the following is NOT an example of the agency problem?
  1. Shareholders find it challenging to control a chief executive officer, who may seek to increase his own pay rather than increase the value of the company.
  2. A company hires workers to expand its business, but then finds it doesn't have enough equipment for them to work on.
  3. The owner of a pizza parlor hires an employee to manage the business while he is away, but he can't monitor whether the employee actually sells pizza or just wastes time.

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