Download Chapter 10 Monopolistic Competition and Oligopoly

Solutions to Even-Numbered, End-of-Chapter Questions, Problems, and Exercises
19
Chapter 10 Monopolistic Competition and Oligopoly
Review Questions
2.
False. In the long run, a monopolistic competitor will not produce at minimum ATC. In long-run
equilibrium, there are too many firms producing too little output to achieve minimum ATC.
4.
In oligopoly there are fewer firms than in perfect competition or monopolistic competition, but
more than in monopoly. Unlike perfectly or monopolistically competitive markets, there are
barriers to entry and exit.
6.
In a natural monopoly, economies of scale extend over a wide-enough range of output that the
lowest cost per unit is attained when a single firm produces for the entire market. In a natural
oligopoly, economies of scale do not extend over as wide a range of output, allowing more than
one competitor to enter.
8.
Difficulty observing other firms’ prices, unstable market demand, and a large number of firms
promote cheating—since they lessen the probability of detection. In addition, unstable market
demand means new terms for collusion must be periodically renegotiated, giving firms the
opportunity to cheat in the interim. Finally, if many firms are involved in collusion, any
individual firm may face a smaller chance of getting caught and facing punishment, thereby
increasing the probability of cheating.
10.
New technologies limit the degree of concentration in an industry by creating new substitute
goods and by breaking down barriers to entry. Two examples are cable television and local phone
companies; both face new competition made possible by technological advances (satellite dishes
in the case of cable TV, and cell phones in the case of local phone companies).
12.
It is difficult to apply the definition of oligopoly to real-world markets since doing so involves
defining the relevant market, deciding what number qualifies as “a few,” and deciding whether
market domination by a few firms occurs.
Problems and Exercises
2.
Initially, the monopolist earns an economic profit by producing where MR = MC. Entry will
Solutions to Even-Numbered, End-of-Chapter Questions, Problems, and Exercises
20
occur, shifting the firm’s demand and marginal revenue curves leftward (to D2 and MR2). Long
run equilibrium will occur at a point like B, where the firm earns zero economic profit.
4.
a.
Price per
Taco Plate
$5
Taco plates
per Week
50
Total Cost per
Week
$30
Total
Revenue per
Week
$250
4
80
$50
$320
3
150
$176
$450
2
800
$1476
$1600
1
1100
$2136
$1100
Marginal
Revenue
Marginal
Cost
$2.33
$0.67
$1.86
$1.80
$1.77
$2.00
-$1.67
$2.20
Tino should expand his output as long as MR exceeds MC. His profit-maximizing price is $3
and his profit-maximizing number of taco plates is 150.
b. Tino’s customers will substitute away from Tino’s tacos towards food from his competitor.
Demand for Tino’s tacos will fall, and Tino’s profits will fall.
c.
Price per
Taco Plate
$5
Taco plates
per Week
60
Total Cost per
Week
$130
Total
Revenue per
Week
$300
4
96
$150
$384
3
180
$276
$540
2
960
$1576
$1920
1
1320
$2236
$1320
Marginal
Revenue
Marginal
Cost
$2.33
$0.55
$1.86
$1.50
$1.76
$1.66
-$1.67
$1.83
Tino’s profit-maximizing price is $2, and his profit-maximizing number of taco plates is 960.
Since Tino earns an economic profit of $344 with this combination, entry will occur until
Tino’s economic profit falls to $0.
6. a.
Solutions to Even-Numbered, End-of-Chapter Questions, Problems, and Exercises
21
The typical plastics firm produces the output level where MC = MR, charges the
corresponding price given by the demand curve, and earns zero economic profit.
b.
Oil is a variable input, so when oil prices increase, the ATC curve and the MC curve at all
firms shift upward. In the short run, the typical plastics firm suffers economic losses.
c. If prices remained high, and profits remained negative, some firms would exit. Other
firms would experience a rightward shift of their demand curves, and in long-run
equilibrium, the remaining firms would earn zero economic profit.
8.
a. In the payoff matrices below, Road Kill’s payoffs are listed on the left side of each square:
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Solutions to Even-Numbered, End-of-Chapter Questions, Problems, and Exercises
Sal Monella
Clean up
Don't Cleanup
5,000
3,000
Clean up
5,000
12,000
Road Kill
Café
12,000
7,000
Don't
Cleanup
3,000
7,000
b. Both Road Kill Café and Sal Monella have a dominant strategy to clean up.
c. If Road Kill Café and Sal Monella act independently, they’ll both clean up and earn $5,000.
d. When facing the same decision repeatedly, Sal Monella and Road Kill Café might decide to
cooperate. By both agreeing to not clean up, they can each increase their income to $7,000
each.
e.
Sal Monella
Clean up
Don't Cleanup
5,000
3,000
Clean up
5,000
6,000
Road Kill
Café
6,000
7,000
Don't
Cleanup
3,000
7,000
The restaurants no longer have dominant strategies. For example, Road Kill’s best action now
depends on what Sal Monella chooses. Without cooperation, we would need a more
sophisticated analysis to predict an outcome. With cooperation, however, the firms will
decide not to clean up, and each will earn $7000.
10. a. Nike has a dominant strategy to go “high.” Adidas does not have a dominant strategy.
b. This game will still have an outcome: Adidas can determine that Nike will go high, so it will
go high also.
c. Nike would choose the outrageously high price if it believed that Adidas would follow. Nike
would earn $1.2 million in profits and Adidas would earn $600,000 in profits. While Nike
would have an incentive to charge the high price if Adidas charged the outrageously high
price, Nike would know that Adidas would follow Nike’s pricing, and this would reduce
Nike’s profit. Therefore, the outcome of the game with Nike as price leader is that both
charge the outrageously high price.
Solutions to Even-Numbered, End-of-Chapter Questions, Problems, and Exercises
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Challenge Questions
2.
a. Neither player has a dominant strategy.
b. The outcome of the game cannot be determined from the information in the payoff matrix
using the tools learned in this chapter.
c. Player 2 has a dominant strategy; it is to choose “B”. When one player has a dominant
strategy, we can predict the outcome. Since Player 1 knows that Player 2 will choose “B,”
Player 1 will maximize his payoff by also choosing “B.”
Economics Applications Exercises
2.
a. Answers may vary.
b. Answers may vary.
c. Answers may vary.