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Micro Test Preparation

Micro Test Preparation. Micro: Friday Morning. MC. MC. MC. MC. 4 Market Structures. Maximize Profit @. MR = MC. MR = MC. MR = MC. MR = MC. Equilibrium Price vs. MC. P = MC. P > MC. P > MC. P > MC. Perfect Competition. Monopolistic Competition. Oligopoly. Monopoly.

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Micro Test Preparation

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  1. Micro Test Preparation Micro: Friday Morning

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

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

  4. MC E1 P1 Economic ATC Profit ATC D MR Q1 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 Quantity 0

  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. A tax on sellers Price S2 shifts the supply Equilibrium buyers curve upward with tax pay by the amount of S1 $3.30 the tax ($0.50). Tax ($0.50) 3.00 Price 2.80 without Equilibrium without tax tax Price sellers Deadweight loss! receive Demand, D1 90 100 Tax on Sellers Price of Ice-Cream Cone Quantity of 0 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 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. Zero Profit, but not at Efficient scale SHORT RUN: Monopolistic Competition LONG RUN: Monopolistic Competition Profit Exists!

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

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