Imperfect Competition

Name: AP Microeconomics Unit 4: Imperfect Competition
Availability: InStock

15–22% of the exam3 lessons · 42 min

What this unit covers

The topics below follow the published Micro course framework for Unit 4. This unit is worth 15–22% of the exam, so budget your time against that rather than against how long the unit takes to teach.

MonopolyOligopolyGame theoryMonopolistic competition

Lessons in this unit

Monopoly15 min · 3 objectivesExplain why a monopolist’s marginal revenue lies below price · Find the monopoly price and quantity using MR = MC · Analyze the efficiency loss and deadweight loss from monopoly
Monopolistic Competition13 min · 3 objectivesDescribe the characteristics of monopolistic competition · Explain the short-run and long-run equilibria of a monopolistically competitive firm · Explain why these firms have excess capacity and are not allocatively efficient
Oligopoly & Game Theory14 min · 3 objectivesDescribe the characteristics of oligopoly and strategic interdependence · Use a payoff matrix to find dominant strategies and Nash equilibrium · Explain the incentive to cheat on collusion using the prisoner’s dilemma

Formulas in Unit 4

Monopoly pricing

Profit-max: MR = MC, then set price from demand: P > MR = MC · Allocative efficiency would require P = MC

Because P > MC at the monopoly output, output is below the efficient level, creating deadweight loss. For linear demand, MR has the same intercept but twice the slope.

Long-run equilibrium features

MR = MC (profit-max) · Zero economic profit (P = ATC, tangency) · P > MC (inefficient) · excess capacity

Like monopoly: downward-sloping demand, MR < P, P > MC. Like perfect competition: easy entry drives long-run profit to zero. Unlike perfect competition: not at minimum ATC.

Reading the game

Dominant strategy: best choice no matter what the rival does · Nash equilibrium: no player gains by changing strategy alone

Analyze one firm at a time: fix the rival’s choice, pick this firm’s best response. Where both firms’ best responses coincide is the Nash equilibrium.

What examiners penalize here

Draw the monopoly graph with demand *above* MR, find output at MR = MC, then go **straight up to the demand curve** for price. Mark the deadweight-loss triangle between demand and MC from the monopoly quantity out to the efficient (P = MC) quantity.
For monopolistic competition, draw it like a "shrunken monopoly": downward-sloping demand with MR below it, MR = MC for quantity, and in the long run the **demand curve tangent to ATC** (zero profit). Label the excess capacity gap between that output and minimum ATC.
To solve a payoff matrix, analyze **one firm at a time**: hold the rival’s choice fixed and find that firm’s best response, then repeat. Where both best responses meet is the **Nash equilibrium**. Always identify dominant strategies before naming the equilibrium.

Practice Micro

Our practice bank is drawn from across the whole course rather than filtered to one unit, which is closer to how the exam asks anyway — it will not tell you which unit a question is testing.

26 practice questionsEvery one with a written explanation FRQ trainerWritten answers scored against the rubric Micro study guideAll units, weights and score data in one place All 6 Micro unitsThe full course

Questions about this unit

How much of the AP Microeconomics exam is Unit 4?

Unit 4, Imperfect Competition, is worth 15–22% of the Micro multiple-choice section according to the published course framework. Across all 6 units that makes it one of the heaviest units on the exam, and worth front-loading.

What topics are covered in Micro Unit 4?

Imperfect Competition covers Monopoly, Oligopoly, Game theory and Monopolistic competition.

How should I study Micro Unit 4?

Read the 3 lessons below first — about 40 minutes — then work practice questions on these topics. Finish with practice questions and read the explanation for every one you get right by elimination as well as the ones you miss.

All 6 units of AP Microeconomics

Unit names, topics and exam weights follow the published College Board course framework for AP Microeconomics. AP® is a trademark registered by the College Board, which does not endorse this site.