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  1. A C T I V E L E A R N I N G 1Calculating TR, AR, MR 0 Fill in the empty spaces of the table. Q P TR AR MR 0 $10 n/a 1 $10 $10 2 $10 3 $10 4 $10 $40 $10 5 $10 $50 0

  2. Profit Maximization $5 9 15 23 33 45 0 (continued from earlier exercise) Q TR TC Profit MR MC Profit = MR–MC At any Q with MR > MC,increasing Q raises profit. 0 $0 $10 1 10 10 2 20 10 At any Q with MR < MC,reducing Q raises profit. 3 30 10 4 40 10 5 50 FIRMS IN COMPETITIVE MARKETS

  3. Costs, P MC P = $10 MR ATC $6 Q 50 A C T I V E L E A R N I N G 2Identifying a firm’s profit 0 A competitive firm Determine this firm’s total profit. Identify the area on the graph that represents the firm’s profit. 2

  4. Costs, P MC ATC $5 P = $3 MR Q 30 A C T I V E L E A R N I N G 3Identifying a firm’s loss 0 A competitive firm Determine this firm’s total loss, assuming AVC < $3. Identify the area on the graph that represents the firm’s loss. 3

  5. A C T I V E L E A R N I N G 1A monopoly’s revenue Common Grounds is the only seller of cappuccinos in town. The table shows the market demand for cappuccinos. Fill in the missing spaces of the table. What is the relation between P and AR? Between P and MR? n.a. 4

  6. A Monopolistic Competitor in the Long Run Entry and exit occurs until P = ATC and profit = zero. Notice that the firm charges a markup of price over marginal cost and does not produce at minimum ATC. Price MC ATC markup Quantity 0 P = ATC D MC MR Q MONOPOLISTIC COMPETITION

  7. EXAMPLE: Cell Phone Duopoly in Smalltown 0 • Smalltown has 140 residents • The “good”: cell phone service with unlimited anytime minutes and free phone • Smalltown’s demand schedule • Two firms: T-Mobile, Verizon(duopoly: an oligopoly with two firms) • Each firm’s costs: FC = $0, MC = $10 OLIGOPOLY

  8. EXAMPLE: Cell Phone Duopoly in Smalltown P Q Revenue Cost Profit $0 140 $0 $1,400 –1,400 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 0 Competitive outcome: P = MC = $10 Q = 120 Profit = $0 Monopoly outcome: P = $40 Q = 60 Profit = $1,800 OLIGOPOLY

  9. A C T I V E L E A R N I N G 1Collusion vs. self-interest 0 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

  10. A C T I V E L E A R N I N G 2The oligopoly equilibrium 0 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

  11. Prisoners’ Dilemma Example 0 Confessing is the dominant strategy for both players. Nash equilibrium: both confess Bonnie’s decision Confess Remain silent Bonnie gets 8 years Bonnie gets 20 years Confess Clyde gets 8 years Clyde goes free Clyde’s decision Bonnie goes free Bonnie gets 1 year Remain silent Clyde gets 1 year Clyde gets 20 years OLIGOPOLY

  12. T-Mobile & Verizon in the Prisoners’ Dilemma 0 Each firm’s dominant strategy: renege on agreement, produce Q = 40. T-Mobile Q = 30 Q = 40 T-Mobile’s profit = $900 T-Mobile’s profit = $1000 Q = 30 Verizon’s profit = $900 Verizon’s profit = $750 Verizon T-Mobile’s profit = $750 T-Mobile’s profit = $800 Q = 40 Verizon’s profit = $800 Verizon’s profit = $1000 OLIGOPOLY

  13. A C T I V E L E A R N I N G 3Answers 0 Nash equilibrium:both firms cut fares American Airlines Cut fares Don’t cut fares $200 million $400 million Cut fares United Airlines $800 million $400 million $600 million $800 million Don’t cut fares $600 million $200 million 12

  14. Another Example: Negative Campaign Ads 0 Each candidate’s dominant strategy: run attack ads. R’s decision Run attack ads (defect) Do not run attack ads (cooperate) no votes lost or gained R gains 1000 votes Do not run attack ads (cooperate) no votes lost or gained D loses 3000 votes D’s decision R loses 3000 votes R loses 2000 votes Run attack ads (defect) D loses 2000 votes D gains 1000 votes OLIGOPOLY