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1 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Unit Info:Length: 2 weeks Assignment: Problem Set #4 Due:________________________Concepts: Unit Exam Date: ______________
Objective:_____________________________________________________________________________________________________________________________________________________________________________________
Monopoly
Characteristics of Monopolies1. ________________________________
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2. _____________________________________________________________3. ________________________________________________________________________________________
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4. ________________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
5. ________________________________________________________________________________________ ________________________________________________________________________________
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Examples of MonopoliesFour Origins of Monopolies
1. _________________________________________________________________________________________EX. __________________________________________________________________________________________________________________________________________________________________________________
– __________________________________________________________________________________________________________________________________________________________________________________
2. __________________________________________________________________________________________EX. ________________________________________________________________________________________
2 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition__________________________________________________________________________________________
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3. _________________________________________________________________________________________EX. __________________________________________________________________________________________________________________________________________________________________________________
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4. _________________________________________________________________________________________EX. __________________________________________________________________________________________________________________________________________________________________________________
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Drawing Monopolies
Good news…1. ________________________________________________________________2. ________________________________________________________________3. ________________________________________________________________4. ________________________________________________________________
The Main Difference
3 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition ________________________________________________________________________________________
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Why is MR less than Demand?
4 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Calculating Marginal Revenue
To sell more a firm must lower its price. What happens to Marginal Revenue?
Price QuantityDemanded
Total Revenue
Marginal Revenue
$6 0
$5 1
$4 2
$3 3
$2 4
$1 5
Does the Marginal Revenue equal the price?
5 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Plot the Demand, Marginal Revenue, and Total Revenue Curves
What happens to TR when MR hits zero?
6 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Elastic vs. Inelastic Range of Demand Curve
Elastic and Inelastic Range
Maximizing Profit
What output should this monopoly produce?How much is the TR, TC and Profit or Loss?
Total Revenue Test:
Total Revenue Test
7 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Conclusion: ___________________________________________________________________________________________________________________________________________________________________________________
What if cost are higher? How much is the TR, TC, and Profit or Loss?
8 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Are Monopolies Efficient?
Perfect Competition
9 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect CompetitionMonopolies
10 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Are Monopolies Productively Efficient? Does Price = Min ATC? _____________________________________________________________________
Monopolies are inefficient because…1. ______________________________________________________________________________________________2. ______________________________________________________________________________________________
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3. ______________________________________________________________________________________________ ________________________________________________________________________________________
_4. ______________________________________________________________________________________________
Why? ___________________________________________________________________________________________________________________________________________________________________________________________
11 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Natural Monopoly
One firm can produce the socially optimal quantity at the lowest cost due to economies scale.
Regulating Monopolies
Why would the government regulate a monopoly? 1. _____________________________________________________________________2. _____________________________________________________________________
How do they regulate? ________________________________________________________________________ ________________________________________________________________________
o ________________________________________________________________________________________________________________________________________________________________
Where should the government place the price ceiling? 1. _____________________________________________________________
_____________________________________________________________________________OR
2. _____________________________________________________________
12 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition_____________________________________________________________________________
Where does the firm produce if it is unregulated? ___________________________________Fair Return means no economic profit
What happens if the government sets a price ceiling to get the socially optimal quantity?
13 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Price DiscriminationDefinition: ___________________________________________________________________________________________________________________________________________________________________________________Examples:• Airline Tickets (vacation vs. business)• Movie Theaters (child vs. adult) • All Coupons (spenders vs. savers) • football games (students vs. parents)
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Requires the following conditions:1. ________________________________________________________________________________________
_2. ________________________________________________________________________________________
_3. ________________________________________________________________________________________
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Results of Price Discrimination
14 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Regular Monopoly vs. Price Discriminating Monopoly
15 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
A perfectly discriminating _________________________________________________________________________________________________________________________________________________________________
Identify the Price: Profit: CS: DWL:
16 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Price Discrimination ______________________________________________________________________________________________________________________________________________________________________
Monopolistic Competition
Characteristics of Monopolistic Competition: ________________________________________________________________________________________
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_ ________________________________________________________________________________________
_ ________________________________________________________________________________________
_ ________________________________________________________________________________________
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“Monopoly” + ”Competition”
Monopolistic Qualities ________________________________________________________________________________________
_ ________________________________________________________________________________________
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17 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition ________________________________________________________________________________________
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Perfect Competition Qualities ________________________________________________________________________________________
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Differentiated Products ________________________________________________________________________________________
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Examples of NON-PRICE Competition ________________________________________________________________________________________
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_1. ____________________________________________________________________________________2. ____________________________________________________________________________________
Drawing Monopolistic Competition
Monopolistic Competition _________________________________________________________________________________________________________________________________________________________________
In the short-run, _________________________________________________________________________________________________
18 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
In the long-run________________________________________________________________________________________________________________________________________________________________________________
Firms enter __________________________________________________________________________________
Price and quantity _______________________________________________
LONG-RUN EQUILIBRIUMQuantity where ________________________ up to Price ______________________________
Why does DEMAND shift?
When short-run profits are made…
19 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition ________________________________________________________________________________________
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When short-run losses are made… ________________________________________________________________________________________
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What happens when there is a loss? In the short-run, _________________________________________________________________________________________________
20 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect CompetitionFirms leave _________________________________________________________________________________________________Price and quantity ______________________________ and ___________________
Are Monopolistically Competitive Firms Efficient?
This firm also has ________________________________________________________________
Excess Capacity
21 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition ________________________________________________________________________________________
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LONG-RUN EQUILIBRIUM The firm ______________________________________________________________________________________________________________________________________________________________________________________
Practice Question1. Assume there is a monopolistically competitive firm in long-run equilibrium. If this firm were to realize productive efficiency, it would:
A) have more economic profit. B) have a loss. C) also achieve allocative efficiency.D) be under producing. E) be in long-run equilibrium
*Draw a monopolistic competitive graph in the long run. *
Advantages of MONOPOLISTIC COMPETITION ________________________________________________________________________________________
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22 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition ________________________________________________________________________________________
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Ex. ______________________________________________________________________________________________________________________________________________________________________________________________
OligopolyCharacteristics of Oligopolies:
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_________________________________________________________________________________________1. ____________________________________________________________________________________
Examples:_____________________________________________________________________________________
HOW DO OLIGOPOLIES OCCUR? ________________________________________________________________________________________
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Types of Barriers to Entry1. ________________________________________________________________________________________
_ ____________________________________________________________________________________
____________________________________________________________________________________2. ________________________________________________________________________________________
_3. ________________________________________________________________________________________
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Game TheoryThe study of how people behave in strategic situationsAn understanding of game theory helps firms in an oligopoly maximize profit.
23 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Game theory helps predict human behavior
THE ICE CREAM MAN SIMULATION1. You are an ice cream salesmen at the beach2. You have identical prices as another salesmen.3. Beachgoers will purchase from the closest salesmen4. People are evenly distributed along the beach.5. Each morning the two firms pick locations on the beach
Where is the best location?
Why learn about game theory?• Oligopolies are interdependent since they compete with only a few
other firms.• Their pricing and output decisions must be strategic as to avoid
economic losses. • Game theory helps us analyze their strategies.
SIMULATION!
Game Theory MatrixYou and your partner are competing firms. You have one of two choices: Price High or Price Low.
Without talking, write down your choice
What did we learn?1. _____________________________________________________________________________________________
_____________________________________________________________________________________________
24 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition2. _____________________________________________________________________________________________
_____________________________________________________________________________________________3. _____________________________________________________________________________________________
_____________________________________________________________________________________________4. _____________________________________________________________________________________________
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2009 FRQB #3Payoff matrix for two competing bus companies
Oligopoly GraphsBecause firms are interdependentThere are 3 types of Oligopolies
1. _________________________________________________________2. _________________________________________________________3. _________________________________________________________
#1. Price LeadershipExample: Small Town Gas StationsTo maximize profit what will they do?
PRICE LEADERSHIP MODEL ____________________________________________________________________________________ ____________________________________________________________________________________
25 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition ____________________________________________________________________________________
____________________________________________________________________________________General Process:
1. ________________________________________________________________________________________2. ________________________________________________________________________________________
Breakdowns in Price Leadership ____________________________________________________________________________________
____________________________________________________________________________________ ____________________________________________________________________________________
Example: ____________________________________________________________________________________
#2. Colluding Oligopolies
Cartel = Colluding Oligopoly
A cartel is a group of producers that create an agreement to fix prices high. 1. ________________________________________________________________________________________
_2. ________________________________________________________________________________________
_3. ________________________________________________________________________________________
_4. ________________________________________________________________________________________
_
Firms in a colluding oligopoly act as a monopoly and share the profit
26 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
#3. Non-Colluding OligopoliesKinked Demand Curve Model
The kinked demand curve model ________________________________________________________________________________________________________________________________________________________
If firms are NOT colluding they are likely to react to competitor’s pricing in two ways:
1. __________________________________- _____________________________________________________________________________________________________________________________________________________
2. __________________________________- _____________________________________________________________________________________________________________________________________________________
If this firm increases it’s price, ____________________________________________________________________________________________________________________________________________________________
As the only firm with high prices, _________________________________________________________________________________________________
If this firm decreases it’s price, ___________________________________________________________________________________________________________________________________________________________ Since all firms have lower prices, _______________________________________________________
27 Name:______________________________College:______________________________
AP Microeconomics Unit IV: Imperfect Competition
Where is Marginal Revenue? MR has ________________________________________________ The result is that ___________________________________________________________________ Price ____________________________
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