Micro Test Preparation Micro: Friday Morning

4 Market Structures Competition Monopolistic Competition Oligopoly Maximize Profit @ MR = MC Equilibrium Price vs. MC P = MC P > MC Perfect Competition Monopolistic Competition Oligopoly Monopoly Long Run Economic Profit Yes No MC Demand & Marginal Revenue Curve

Social Optimal set P = MC “fair profit” set P = ATC Max. Profit: set MC = MR Social Optimal set P = MC “fair profit” set P = ATC Max. Revenue: set MR = 0 EM ESO ETR ----------------- EFP

LUMP SUM TAX OR SUBSIDY=> no change in quantity or price Costs and Per unit TAX (excise) OR SUBSIDY: shifts MC => change P & Q Revenue MR D MC E1 P1 Q1 Economic Profit ATC ATC Quantity

Tax Summary Tax on buyers shifts D-curve, Tax on sellers shifts S-Curve Taxes always produce deadweight loss! Tax Incidence does not depend on who pays the tax! Buyers & Sellers share the burden Elasticity determines who bears the most! The majority of the tax burden falls on the side of the market that is less elastic (more inelastic, steeper curve pays more of tax)

Tax on Sellers Price of Ice-Cream Demand, D1 Price buyers pay Cone S2 A tax on sellers shifts the supply curve upward by the amount of the tax ($0.50). Price buyers pay Cone S2 Equilibrium with tax S1 $3.30 90 Tax ($0.50) Price without tax 3.00 100 Deadweight loss! Equilibrium without tax 2.80 Price sellers receive Quantity of Ice-Cream Cones

Example: Monopoly Equilibrium To Find Equilibrium: Set MC = MR Line up to Demand Curve --------------- --------------------------- Opportunity Costs: Lower QTY Higher Price Deadweight Loss

Oligopoly: Game Theory Every Dominant Strategy is a Nash Equilibrium BUT: Every Nash Equilibrium is not a dominant strategy Liz HIGH LOW HIGH 400, 300 -800, 500 LOW 600, -800 -500, -500 Bob Easy way to find dominant strategy: First, Circle each players preferred boxes Second, if 2 circles in same row you have a Dominant Strategy Both Liz and Bob would choose Low! It is an enforceable equilibrium because there is no incentive to cheat

SHORT RUN: Monopolistic Competition LONG RUN: Monopolistic Competition Profit Exists! Zero Profit, but not at Efficient scale

AP Test Day Multiple Choice Free Response 60 questions 70 minutes Must use black pen & blue pen 10 minutes to plan 50 minutes to write