ACTIVE LEARNING
1
Calculating TR, AR, MR
Fill in the empty spaces of the table.
Q
P
TR
0
$10
n/a
1
$10
$10
2
$10
3
$10
4
$10
AR
MR
$40
$10
5
$10
$50
0
Profit Maximization
(continued from earlier exercise)
At any Q with
MR > MC,
increasing Q
raises profit.
At any Q with
MR < MC,
reducing Q
raises profit.
Q
TR
TC
0
$0
$5
1
10
9
2
20
15
3
30
23
4
40
33
Profit MR MC
Profit =
MR – MC
$10
10
10
10
10
5
50
FIRMS IN COMPETITIVE MARKETS
45
1
ACTIVE LEARNING
2
Identifying a firm’s profit
Determine
this firm’s
total profit.
Identify the
area on the
graph that
represents
the firm’s
profit.
A competitive firm
Costs, P
MC
MR
ATC
P = $10
$6
50
Q
2
ACTIVE LEARNING
3
Identifying a firm’s loss
Determine
this firm’s
total loss,
assuming
AVC < $3.
A competitive firm
Costs, P
MC
ATC
Identify the
area on the
graph that
represents
the firm’s
loss.
$5
MR
P = $3
30
Q
3
ACTIVE LEARNING
1
A monopoly’s revenue
Common Grounds
is the only seller of
cappuccinos in town.
Q
P
0
$4.50
The table shows the
market demand for
cappuccinos.
1
4.00
2
3.50
Fill in the missing
spaces of the table.
3
3.00
4
2.50
What is the relation
between P and AR?
Between P and MR?
5
2.00
6
1.50
TR
AR
MR
n.a.
4
A Monopolistic Competitor in the Long Run
Entry and exit
occurs until
P = ATC and
profit = zero.
Price
Notice that the
P = ATC
firm charges a
markup of price
markup
over marginal cost
and does not
MC
produce at
minimum ATC.
MONOPOLISTIC COMPETITION
MC
ATC
D
MR
Q
Quantity
5
EXAMPLE: Cell Phone Duopoly in Smalltown
 Smalltown has 140 residents
P
Q
$0
140
5
130
10
120
15
110
20
100
25
90
30
80
(duopoly: an oligopoly with two firms)
35
70
 Each firm’s costs: FC = $0, MC = $10
40
60
45
50
OLIGOPOLY
 The “good”:
cell phone service with unlimited
anytime minutes and free phone
 Smalltown’s demand schedule
 Two firms: T-Mobile, Verizon
6
EXAMPLE: Cell Phone Duopoly in Smalltown
P
Q
$0
140
5
130
650
1,300
–650
10
120
1,200
1,200
0
15
110
1,650
1,100
550
20
100
2,000
1,000
1,000
25
90
2,250
900
1,350
30
80
2,400
800
1,600
35
70
2,450
700
1,750
40
60
2,400
600
1,800
45
50
2,250
500
1,750
OLIGOPOLY
Revenue
Cost
Profit
$0 $1,400 –1,400
Competitive
outcome:
P = MC = $10
Q = 120
Profit = $0
Monopoly
outcome:
P = $40
Q = 60
Profit = $1,800
7
ACTIVE LEARNING
1
Collusion vs. self-interest
P
Q
$0
140
5
130
10
120
15
110
20
100
25
90
30
80
35
70
40
60
45
50
Duopoly outcome with collusion:
Each firm agrees to produce Q = 30,
earns profit = $900.
If T-Mobile reneges on the agreement and
produces Q = 40, what happens to the
market price? T-Mobile’s profits?
Is it in T-Mobile’s interest to renege on the
agreement?
If both firms renege and produce Q = 40,
determine each firm’s profits.
8
ACTIVE LEARNING
2
The oligopoly equilibrium
P
Q
$0
140
5
130
10
120
15
110
20
100
25
90
30
80
35
70
40
60
45
50
If each firm produces Q = 40,
market quantity = 80
P = $30
each firm’s profit = $800
Is it in T-Mobile’s interest to increase its
output further, to Q = 50?
Is it in Verizon’s interest to increase its
output to Q = 50?
9
Prisoners’ Dilemma Example
Confessing is the dominant strategy for both players.
Nash equilibrium:
Bonnie’s decision
both confess
Confess
Confess
Clyde’s
decision
Bonnie gets
8 years
Clyde
gets 8 years
Bonnie goes
free
Remain
silent Clyde
gets 20 years
OLIGOPOLY
Remain silent
Bonnie gets
20 years
Clyde
goes free
Bonnie gets
1 year
Clyde
gets 1 year
10
T-Mobile & Verizon in the Prisoners’ Dilemma
Each firm’s dominant strategy: renege on agreement,
produce Q = 40.
T-Mobile
Q = 30
Q = 30
Verizon
Q = 40
OLIGOPOLY
T-Mobile’s
profit = $900
Verizon’s
profit = $900
T-Mobile’s
profit = $750
Verizon’s profit
= $1000
Q = 40
T-Mobile’s
profit = $1000
Verizon’s
profit = $750
T-Mobile’s
profit = $800
Verizon’s
profit = $800
11
ACTIVE LEARNING
3
Answers
Nash equilibrium:
both firms cut fares
American Airlines
Cut fares
$400 million
Don’t cut fares
$200 million
Cut fares
United
Airlines
$400 million
$800 million
$800 million
$600 million
Don’t cut
fares
$200 million
$600 million
12
Another Example: Negative Campaign Ads
Each candidate’s
dominant strategy:
run attack ads.
R’s decision
Do not run attack
ads (cooperate)
Do not run
attack ads
(cooperate)
D’s decision
Run
attack ads
(defect)
OLIGOPOLY
no votes lost
or gained
no votes
lost or gained
Run attack ads
(defect)
R gains 1000
votes
D loses
3000 votes
R loses 3000
votes
D gains
1000 votes
R loses
2000 votes
D loses
2000 votes
13