## Tuesday, November 4, 2014

### Monopoly 9 - AP exam necessities

• Total Profit = (P-ATC) x Q
• Profit for 1 unit = (P-ATC) x 1
• TR = (P x Q)
• Allocative Efficiency = (MC = D) or (P = MC) also called Socially Optimal Level/Quantity or Socially Efficient Quantity
• Marginal Revenue is negative = inelastic section of Demand curve.
• Marginal Revenue is  positive = elastic section of demand curve.
• Zero Economic Profit = (P = ATC)
• Positive Economic Profit = (P > ATC)
• Losses(P < ATC)
• Profit Max = (MR = MC)
• Max Revenue = (MR = 0) where TR is maxed.
• Break-even = (P = ATC)
• Unit Elasticity = (MR = 0)
• Inelasticity = (MR < 0) or negative
• Elasticity = (MR > 0) or positive
• Demand curve is above MR, why?
• Economic Profit = TR - explicit - implicit
• If you raise your price and TR (decreases) you are in the elastic section of Demand curve
• If you lower your price and TR (increases) you are in the elastic section of the Demand curve
• If you raise your price and TR (increases) you are in the inelastic section of the Demand curve
• If you lower your price and TR (decreases) you are in the inelastic section of the demand curve
• If demand shifts, what happens to P, Q, & MR?
• Positive Accounting Profits = (covering explicit costs)
• Opportunity Cost = implicit costs (implicit costs include entrepreneurs payment to self)
• (MC > P) = (MSC > MSB) = Society has enough units of this product (Overproduction)
• (P = MC) = Allocative Efficiency (MSB = MSC)
• (MC < P) = (MSB > MSC) = (P > MC) = Society values more of this product (Underproduction)
• Accounting Profit + Explicit Cost = Total Revenue
• Accounting profit - implicit costs = Economic Profit
• Economic Profit  = TR - explicit + implicit costs
• Accounting profit = TR - explicit costs
• Total Revenue - explicit costs = Accounting Profit
• Monopoly is the industry thus it has a downward sloping demand curve
• MR is less than Price(Demand) - for every level of output (except the first), why? - the lower price applies not only to the extra output sold but also to all prior units of output.

## Monopoly 8 - Price Discrimination

Price Discrimination Monopoly - Video - Welker

Price Discrimination -  exists when a producer charges a different price to consumers for an identical good or service.

Assumptions:
• the firm must possess some degree of market power (downward sloping demand curve)
• elasticity of demand is different in different markets
• firm must be able to separate markets with similar elasticities  to prevent reselling

Video of 1st, 2nd & 3rd degree

### First degree discrimination, known as perfect price discrimination, occurs when a firm charges a different price for every unit consumed.

The firm is able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surplus for itself. In practice, first-degree discrimination is rare.

### Second degree

Second-degree price discrimination means charging a different price for different quantities, such as quantity discounts for bulk purchases.

### Third degree

Third-degree price discrimination means charging a different price to different consumer groups. For example, rail and tube travellers can be subdivided into commuter and casual travellers, and cinema goers can be subdivide into adults and children. Splitting the market into peak and off peak use is very common and occurs with gas, electricity, and telephone supply, as well as gym membership and parking charges. Third-degree discrimination is the commonest type.

#### Necessary conditions for successful discrimination

Graph -

• More output
• More profit
Many pay higher prices, but some pay below the single price

2013 AP Microeconomics Exam

## Monopoly 7 - Lump-Sum & Per-Unit

The AP exam will often ask you to correctly graph a monopoly firm's profits or loss and then evaluate what happens if a per-unit/lump-sum tax or subsidy is imposed/provided.

You must know how to answer what happens to the firms, quantity, price, profits, consumer surplus, DWL, losses due to a per-unit or lump-sum.

Remember, a lump-sum is treated/viewed as a Fixed Cost (FC) and therefore will shift the ATC curve up(tax) or down (subsidy) but it will not effect the MC marginal cost curve.

Lump-Sum Subsidy - Monopoly
Q- No change - (as MC not effected)
P - No change - (as MC not effected)
CS - No change - (as MC not effected)
DWL - No change - (as MC not effected)
Profits (increase) Losses (decrease)

Lump-Sum Tax - Monopoly
Q- No change - (as MC not effected)
P - No change - (as MC not effected)
CS - No change - (as MC not effected)
DWL - No change - (as MC not effected)
Profits (decrease) Losses (increase)

A per-unit tax is treated as a VC, variable cost and will shift the ATC up(tax) or down(subsidy) but it will also shift the MC curve left(tax) or right(subsidy).

Per-Unit Tax - Monopoly (graph to come)
Q - Decrease (MC will shift left and up)
P - Increase (MC will shift left and up)
CS - Decrease
Profits (decrease) Losses (increase)
DWL - Increase (less supplied DWL increases) “Quantity levels less than or greater than the efficient quantity create efficiency losses (or deadweight losses).”

 Q is decreasing, price is increasing, profits (decrease) Losses (increase), DWL has increased as less is produced.

Per-Unit Subsidy - Monopoly (graph to come)
Q - Increase (MC will shift right and down)
P - Decrease (MC will shift right and down)
CS - Increase
Profits (increase) Losses (decrease)
DWL - Decrease (more supplied DWL decreases)  “Quantity levels less than or greater than the efficient quantity create efficiency losses (or deadweight losses).”

 Q is increasing,  price is decreasing, profits (increase) Losses (decrease), DWL has decreased as less is produced.

2012 AP Economics Exam FRQ, Q1

2007 AP Microeconomics Exam