AP Microeconomics Unit 4 Imperfect Competition Questions

Analyze imperfect competition through monopoly and discrimination, differentiated firms, oligopoly strategy, payoff matrices, market power, surplus, and efficiency.

Exam points

identify imperfect competition from market power, downward-sloping firm demand and barriers to entry
use demand, MR, MC and ATC to find monopoly output, price and economic profit or loss
calculate consumer surplus, producer surplus and deadweight loss and compare monopoly with competition
analyze natural-monopoly regulation at allocatively efficient or zero-profit prices
apply the conditions for price discrimination and elasticity-based prices across buyer groups

Covered syllabus points

4.1 Introduction to Imperfectly Competitive Markets 4.2 Monopoly 4.3 Price Discrimination 4.4 Monopolistic Competition 4.5 Oligopoly and Game Theory

[Maximum number: 9]

Arzeye Pharma has a patent, a legal barrier to entry, on its newly developed eye treatment that cures common eye problems. Arzeye Pharma is currently earning positive economic profit and is producing the profit-maximizing quantity of eye treatments.

(a)

Draw a correctly labeled graph for Arzeye Pharma and show each of the following.

[ 4 ]

(i)

The profit-maximizing quantity of eye treatments, labeled Q*

[ 1 ]

(ii)

The profit-maximizing price, labeled $\mathrm{P}^{*}$

[ 1 ]

For the third point, the graph must show the profit-maximizing price, labeled $\mathrm{P}^{*}$ , from the downward-sloping demand curve at Q*.

Figure for Answer to Question (ii) — AP Microeconomics

(iii)

The average total cost curve consistent with positive economic profit, labeled ATC

[ 1 ]

(iv)

The area representing consumer surplus, shaded completely

[ 1 ]

(b)

Suppose Arzeye Pharma wants to charge a price that maximizes its total revenue rather than its profit.

[ 1 ]

(i)

On your graph in part (a), show the revenue-maximizing quantity, labeled $\mathrm{Q}_{\mathrm{R}}$ .

[ 1 ]

(ii)

The graph from part (a) must show the quantity that maximizes total revenue, labeled $\mathrm{Q}_{\mathrm{R}}$ , where marginal revenue equals 0. Price, Cost

Figure for Answer to Question (i) — AP Microeconomics

1 point

(c)

Suppose now that Arzeye Pharma engages in perfect price discrimination.

[ 3 ]

(i)

On your graph in part (a), show the lowest price that Arzeye Pharma would charge, labeled $\mathrm{P}_{2}$ .

[ 1 ]

(i) The graph from part (a) must show the lowest price that Arzeye Pharma would charge if it engaged in perfect price discrimination, labeled $\mathrm{P}_{2}$ , from the intersection of the demand and marginal cost curves.

(ii)

What would happen to consumer surplus? Explain.

[ 2 ]

(d)

Suppose instead that Arzeye Pharma's patent expires. Will the demand for Arzeye Pharma's treatment become more elastic, become less elastic, or not change? Explain.

Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.

[ 1 ]

[Maximum number: 6]

Voda Reservoir is a profit-maximizing firm and the only producer of bottled water in a country.

Currently, Voda Reservoir is earning negative economic profit.

(a)

Draw a correctly labeled graph for Voda Reservoir and show each of the following.

[ 5 ]

(i)

The profit-maximizing quantity, labeled $\mathrm{Q}_{\mathrm{M}}$

[ 2 ]

Draw a correctly labeled graph for Voda Reservoir with a downward-sloping demand (D) curve and a downward-sloping marginal revenue (MR) curve with the MR curve below the D curve.

The graph must show a rising marginal cost (MC) curve and the profit-maximizing quantity, labeled $\mathrm{Q}_{\mathrm{M}}$ , where $\mathrm{MR}=\mathrm{MC}$ . Figure for Answer to Question (i) — AP Microeconomics

(ii)

The profit-maximizing price, labeled $\mathrm{P}_{\mathrm{M}}$

[ 1 ]

The graph must show the profit-maximizing price, labeled $\mathrm{P}_{\mathrm{M}}$ , from the D curve at $\mathrm{Q}_{\mathrm{M}}$ .

(iii)

The average total cost curve consistent with Voda Reservoir earning negative economic profit, labeled ATC

[ 1 ]

(iv)

The area of deadweight loss, shaded completely

[ 1 ]

(b)

Suppose new producers have entered the bottled-water market and Voda Reservoir continues to operate in the bottled-water market. Will the demand for Voda Reservoir's bottled water become more elastic, become less elastic, or stay the same as new producers enter the market?

[ 1 ]

[Maximum number: 9]

The graph below shows the demand curve (D), marginal revenue curve (MR), marginal cost curve (MC), average total cost curve (ATC), and long-run average total cost curve (LRATC) for a monopolist.

Figure for Question 3 — AP Microeconomics

(a)

Using the numbers given in the graph, identify each of the following for the profit-maximizing monopolist.

[ 3 ]

(i)

The quantity produced

[ 1 ]

(ii)

The price

[ 1 ]

(iii)

The allocatively efficient quantity

[ 1 ]

(b)

Now assume that the monopolist produces 10 units. Using the numbers given in the graph, calculate each of the following. Show your work.

[ 3 ]

(i)

The monopolist's economic profit

[ 1 ]

(ii)

The consumer surplus

[ 1 ]

(iii)

The deadweight loss

[ 1 ]

1 point:

One point is earned for correctly showing the calculation of the deadweight loss.
DWL = 1/2 $(\$ 20-\$ 10) \times(10-8)=\$ 10$
Other correct calculations are acceptable.

(c)

At what quantity is demand unit elastic?

[ 1 ]

(d)

Suppose the monopolist perfectly price discriminates and chooses the quantity that maximizes profit. Determine the dollar value of each of the following.

[ 2 ]

2 points:

- One point is earned for correctly determining the monopolist's profit.

1 / 2[(\$ 60-\$ 20) \times 8]=\$ 160

- One point is earned for correctly determining the consumer surplus as zero.

6 points (2+1+3)

Figure for Answer to Question (d) — AP Microeconomics

(i)

The monopolist's profit

[ 1 ]

(ii)

The consumer surplus

[ 1 ]

[Maximum number: 1]

The table below shows the total cost and total benefit of advertisements placed by AZY Foods, a firm in the retail food market.

Table for Question 4 — AP Microeconomics

There are many firms in the retail food market. Each firm places its own firm-specific advertisements without considering the actions of its competitors. In what market structure is AZY Foods operating?

All question bank results loaded

Covered syllabus points

Question 1

Question (a)

Question (i)

Question (ii)

Question (iii)

Question (iv)

Question (b)

Question (i)

Question (c)

Question (i)

Question (ii)

Question (d)

Question 2

Question (a)

Question (i)

Question (ii)

Question (iii)

Question (iv)

Question (b)

Question 3

Question (a)

Question (i)

Question (ii)

Question (iii)

Question (b)

Question (i)

Question (ii)

Question (iii)

Question (c)

Question (d)

Question (i)

Question (ii)

Question 4