Download CHAPTER 11 MONOPOLISTIC COMPETITION AND

CHAPTER 11
MONOPOLISTIC COMPETITION AND OLIGOPOLY
EVEN NUMBER ANSWERS, SOLUTIONS, AND EXERCISES
ANSWERS TO ONLINE REVIEW QUESTIONS
2. False. In the long run, a monopolistic competitor will not produce at minimum ATC. In longrun 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.
PROBLEM SET
2.
Price
MC
P1
ATC
P2
E
D2
MR2
Q2
Q1
MR1
D1
Quantity
Initially, the monopolist earns an economic profit by producing where MR = MC, i.e.
producing quantity Q1 at price P1. Entry will occur, shifting the firm’s demand and
marginal revenue curves leftward (to D2 and MR2). Long-run equilibrium will occur at
point E, where the firm earns zero economic profit.
4. a.
Price per
Taco Plate
Taco Plates
per Week
Total Cost
per Week
Total
Revenue per
Week
$5
50
$30
$250
4
3
2
1
80
150
800
1100
$50
$176
$1476
$2136
Marginal
Revenue
Marginal
Cost
$2.33
$0.67
$1.86
$1.80
$1.77
$2.00
-$1.67
$2.20
$320
$450
$1600
$1100
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.
Price per
Taco Plate
Taco Plates
per Week
Total Cost
per Week
Total
Revenue per
Week
$5
60
$130
$300
4
3
2
1
96
180
960
1320
$150
$276
$1576
$2236
Marginal
Revenue
Marginal
Cost
$2.33
$0.55
$1.86
$1.50
$1.76
$1.67
-$1.67
$1.83
$384
$540
$1920
$1320
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.
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 if oil prices increase, the ATC curve and the MC curve of all
firms shift upward. In the short run, the typical plastics firm suffers an economic loss.
c. If price 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 first:
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 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.
MORE CHALLENGING
12.
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.”