1. Micro Test Preparation
Micro: Friday Morning

2. 4 Market Structures Competition Monopolistic Competition Oligopoly
Maximize
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

3. 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

4. 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

5. 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)

6. 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

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

8. 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

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

10. 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