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Unit 5 Test Study Guide: AP Microeconomics Monopolistic competitionHow P&Q is chosenBarriers to entryNumber of firmsShort- vs long-runExcess capacityProduct differentiationRelationship to efficiencyOligopolyGame theoryPayoff matrix / interdependencyDominant strategyNash equilibriumCollusionTit-for-Tat / repeated gamesCartels and anti-trust policyPrice leadership4 types of goodsMarket failure inefficiency Public goods ‐ Free rider problem ‐ Rival in consumption ‐ Excludability ‐ Common resources ‐ Tragedy of the commons ‐ Private goods ‐ Artificially scarce goodsExternalities ‐ Marginal private, social cost ‐ Marginal private, social benefit ‐ Positive externalities: MPB < MSB ‐ Negative externalities: MPC < MSC ‐ Social optimum point ‐ Deadweight loss from externalities ‐ Pigouvian tax or subsidy ‐ Coase theorem Practice problem 1: Oligopoly 2588260666115EuroLux00EuroLuxThe town of Portlandia has only two specialty groceries in town, Petit Paris and EuroLux. Each firm can choose to expand their business into a sidewalk café or not. The payoff matrix below shows the profits for any combination of strategies the two grocers can choose. The payoff for Petit Paris is listed first; the payoff for EuroLux is listed second. Assume both grocers have complete information.365760056515Don’t expand00Don’t expand191325556515Expand00Expand-1144270-43180Expand00Expand-2170430201930Petit Paris00Petit Paris$1000 $600$1700 $650-1304290-39370Don’t expand00Don’t expand$750 $1950$900 $600If EuroLux chooses to expand, what strategy will Petit Paris select? Explain using dollar values.Does EuroLux have a dominant strategy? Explain using dollar values in the payoff matrix.Imagine firms choose strategies simultaneously, without cooperation. What is the profit of each firm? Imagine firms agree to collude to make a joint (total) profit of $2700 by only EuroLux expanding its business to include a sidewalk café. If such an agreement were not legally enforceable, does Petit Paris have an incentive to cheat? Explain using specific values.Practice problem 2: Monopolistic A firm named Pac-Box produces specialty lunch boxes in a monopolistically competitive industry. The company currently produces the profit-maximizing quantity of lunch boxes in the short-run. From the graph above, identify each of the following: The quantity producedThe price chargedThe firm’s profit or lossIn the long-run, explain how the following will be affected (e.g., increase, decrease, or no change): The number of firmsThe firm’s profitIn the long-run equilibrium, will the firm achieve the follow? Explain your reasoning.Allocative efficiencyProductive efficiencyEconomies of scale (d) How does a lump sum tax affect this model? How does a per-unit tax affect this model? Answers to practice FRQsProblem 1 – game theorya) Petit Paris will expand as well, because their profit will be $1000 rather than $750. b) EuroLux does not have a dominant strategy. If Petit Paris expands, then EuroLux should not expand because they would make $650 rather than $600. But if Petit Paris doesn’t expand, EuroLux should expand, because they’d have profits of $1,950 rather than $600. c) Petit Paris will earn $1700 and EuroLux will earn $650.d) Yes, Petit Paris would have an incentive to cheat. Petit Paris only earns $750 if they do not expand, but if they also expand, they’d get another $300 in profits. Problem 2 – monopolistic competitiona) (i) 160(ii) $16(iii) $3 x 160 = $480b) (i) increases as firms can and will enter the market in response to profits(ii) will decrease to zeroc) (i) No, because price charged by the firm is greater than marginal cost. (ii) No, because the firm will charge a price greater than the minimum LR average total cost(iii) Yes, because the firm will operate in the part of the LRATC curve where ATC is fallingd. lump sum tax: ATC increases; per-unit: MC increases, shift to left, ATC will increase ................
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