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

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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)

__________________________________________________________________________________________________________________________________________________________________________________________

__________________________________________________________________________________________________________________________________________________________________________________________

Requires the following conditions:1. ________________________________________________________________________________________

_2. ________________________________________________________________________________________

_3. ________________________________________________________________________________________

_

Results of Price Discrimination

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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: ________________________________________________________________________________________

_ ________________________________________________________________________________________

_ ________________________________________________________________________________________

_ ________________________________________________________________________________________

_ ________________________________________________________________________________________

_

“Monopoly” + ”Competition”

Monopolistic Qualities ________________________________________________________________________________________

_ ________________________________________________________________________________________

_

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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 ____________________________________________________________________________________ ____________________________________________________________________________________

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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 ____________________________