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A C T I V E L E A R N I N G 1 Calculating TR, AR, MR 0 Fill in the empty spaces of the table. $50$105 $40$104 3 2 1 n/a$100 TRPQ MRAR $10.

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Presentation on theme: "A C T I V E L E A R N I N G 1 Calculating TR, AR, MR 0 Fill in the empty spaces of the table. $50$105 $40$104 3 2 1 n/a$100 TRPQ MRAR $10."— Presentation transcript:

1 A C T I V E L E A R N I N G 1 Calculating TR, AR, MR 0 Fill in the empty spaces of the table. $50$105 $40$ n/a$100 TRPQ MRAR $10

2 FIRMS IN COMPETITIVE MARKETS 1 Profit Maximization $5$00  Profit = MR – MC MCMRProfitTCTRQ At any Q with MR > MC, increasing Q raises profit. 10 $10 (continued from earlier exercise) At any Q with MR < MC, reducing Q raises profit.

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

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

5 A C T I V E L E A R N I N G 1 A monopoly’s revenue 4 QPTRARMR 0$ n.a. 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?

6 MONOPOLISTIC COMPETITION 5 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. Quantity Price ATC D MR Q MC P = ATC markup

7 OLIGOPOLY 6 PQ $ EXAMPLE: Cell Phone Duopoly in Smalltown  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

8 OLIGOPOLY $0 QP 1,750 1,800 1,750 1,600 1,350 1, –650 –1,400 Profit ,000 1,100 1,200 1,300 $1,400 Cost 2,250 2,400 2,450 2,400 2,250 2,000 1,650 1, $0 Revenue EXAMPLE: Cell Phone Duopoly in Smalltown Competitive outcome: P = MC = $10 Q = 120 Profit = $0 Competitive outcome: P = MC = $10 Q = 120 Profit = $0 Monopoly outcome: P = $40 Q = 60 Profit = $1,800 Monopoly outcome: P = $40 Q = 60 Profit = $1,800

9 A C T I V E L E A R N I N G 1 Collusion vs. self-interest 8 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. PQ $

10 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? A C T I V E L E A R N I N G 2 The oligopoly equilibrium 9 PQ $

11 OLIGOPOLY 10 Prisoners’ Dilemma Example Confess Remain silent Confess Remain silent Bonnie’s decision Clyde’s decision Bonnie gets 8 years Clyde gets 8 years Bonnie gets 20 years Bonnie gets 1 year Bonnie goes free Clyde goes free Clyde gets 1 year Clyde gets 20 years Confessing is the dominant strategy for both players. Nash equilibrium: both confess

12 OLIGOPOLY 11 T-Mobile & Verizon in the Prisoners’ Dilemma Q = 30 Q = 40 Q = 30 Q = 40 T-Mobile Verizon T-Mobile’s profit = $900 Verizon’s profit = $900 T-Mobile’s profit = $1000 T-Mobile’s profit = $800 T-Mobile’s profit = $750 Verizon’s profit = $750 Verizon’s profit = $800 Verizon’s profit = $1000 Each firm’s dominant strategy: renege on agreement, produce Q = 40.

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

14 OLIGOPOLY 13 Another Example: Negative Campaign Ads Do not run attack ads (cooperate) R’s decision D’s decision no votes lost or gained R gains 1000 votes R loses 2000 votes R loses 3000 votes D loses 3000 votes D loses 2000 votes D gains 1000 votes Each candidate’s dominant strategy: run attack ads. Run attack ads (defect) Do not run attack ads (cooperate) Run attack ads (defect)


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