1. AP Microeconomics Review #3 (part 2)
Rixie
April 20, 2017

2. Monopoly
Graphical Analysis; Profit-maximization; Efficiency; Price-Discrimination; Government regulation

3. Monopoly– second of four market structures
As much of this information is already typed out in the Unit 3 Key Concepts Outline (PDF), most of this section will consist of graphs/visuals.
Use the outline along with this PowerPoint!!!

4. Graph of a typical, unregulated, non-price discriminating monopoly
The shaded rectangle is profit, which is positive because the price is above ATC.
The green triangle outlines the consumer surplus.
The blue triangle outlines deadweight loss.

5. Graph of a non-price discriminating monopoly compared to price-discrimination
MR increases & becomes equal to demand
The quantity produced increases
Consumer surplus no longer exists, and that area becomes part of the profit (TR & profit increase)
No DWL

6. Government regulation of monopolies
Fair-return pricing: government sets price = ATC
Socially-optimal (allocatively efficient) pricing: government sets price = MC
(Both types will increase Q and decrease P)

7. Monopolistic Competition
Graphical Analysis; Profit-maximization; Efficiency

8. Monopolistic Competition – third of four market structures
As much of this information is already typed out in the Unit 3 Key Concepts Outline (PDF), most of this section will consist of graphs/visuals.
Use the outline along with this PowerPoint!!!

9. Graph of a monopolistically competitive firm – short-run profit vs
Graph of a monopolistically competitive firm – short-run profit vs. short-run loss
The graph looks very similar to that of a monopoly.
The profit (or loss) rectangle is still found by going down or up to ATC from the price at the profit-maximizing quantity

10. Graph of a monopolistically competitive in long-run equilibrium
Firms in the monopolistic competition market structure will break even (= zero economic profit = normal profit) in the long-run, like perfectly competitive firms
Must show P = ATC by drawing ATC tangent to the demand curve at the price
Unlike perfectly competitive firms, M.C. firms are NOT efficient
Like monopolies, M.C. firms have DWL (outlined in blue) and you can also identify consumer surplus (outlined in green) P* Q*

11. Oligopoly
Characteristics; Payoff Matrix

12. How to interpret a payoff matrix
The value on the left in each cell is the daily payoff (profit) for PieCrust. The value on the right in each cell is the daily payoff (profit) for LaPizza.
In this case, PieCrust has a dominant strategy to advertise, because regardless of what LaPizza does, PieCrust will make more profit for itself by advertising than by not advertising (250 > 180 & 450 > 390).
LaPizza has no dominant strategy, because their best strategy changes based on what PieCrust does. If PieCrust advertises, LaPizza should not advertise, because they will make more profit than if they do advertise (300 > 200). If PieCrust does not advertise, LaPizza should advertise (500 > 400).

13. How to find the Nash equilibrium
If both players have access to this data, we can assume that Pie Crust will follow their dominant strategy and advertise. LaPizza will realize that as well, and so will choose to not advertise in order to earn more profit (300 > 200).
This is the Nash equilibrium, as it can be predicted that both players will voluntarily end up in the same cell. PieCrust will earn $450 & LaPizza will earn $300.

14. How to re-draw the payoff matrix
The FRQ section may ask you to re-draw the payoff matrix using new information. For instance, it may say:
Assume the cost of advertising has increased by $20 a day. Re-draw the daily payoff matrix to reflect this additional cost.
Since advertising now costs $20 more a day, the payoff (or profit) associated with that strategy will decrease by $20, as the firms are spending more money to advertise.
The strategy to “not advertise” is not affected by this. See re-drawn matrix on the next slide.

15. How to re-draw the payoff matrix
Original Payoff Matrix:
LaPizza
Advertise
Not Advertise
PieCrust
$230, $180
$430, $300
$180, $480
$390, $400
New Payoff Matrix: