Download Answer Key

Answer Key, Principles of Microeconomics, 8th Edition — Chapter 11
CHAPTER ELEVEN
Answers to Test Your Understanding Questions
1. a) 71.7% ($66/$92)
b) oligopoly industry (it is higher than the 40%, which is the accepted break-off
figure.)
2. The restaurant market is not considered to be perfectly competitive since there are
many differences between restaurants including location, service, quality of food, and
so on. This is evidenced by the fact that people do show preferences over which
restaurants they attend. Therefore, it is an example of a monopolistically competitive
market.
3. Some firms within the industry will go out of business (exit). Graphically, this would
shift the demand curve faced by each of the remaining firms to the right so that it once
again became tangent to the average cost curve.
4. a) Output Q2. (this is the profit-maximizing output where MC=MR.)
b) Excess capacity of Q4 – Q2. (economic capacity is the output where AC is
minimum.)
5. Oligopoly and monopolistic competition differ in that oligopoly is comprised of only a
few, relatively big, firms whereas in monopolistic competition there are a large number
of firms.
6. a) Game theory analysis suggests that the other firm would be forced to respond with
a new advertising campaign possibly using another high profile sports figure.
b) Relative market share between the two firms probably would not change much
from what it was initially.
c) The two firms would be tempted to come to an (illegal) agreement avoiding
expensive adverting campaigns in the future.
1
Answer Key, Principles of Microeconomics, 8th Edition — Chapter 11
7. a) See the following figure:
Spartan Inc
cheat
stick to agreement
Cell A
stick to
agreement
Cell B
$25
$35
$25
$15
Trojan Ltd
Cell D
Cell C
cheat
$15
$20
$20
$35
b) Cell D. They will end up both cheating.
8. a) Output: Q1
(where MC = MR)
b) Price: P1
9.
a) Oligopolies do not achieve economic capacity, which means that they do not
operate at minimum average cost. Furthermore, because of their market power, they
are able to charge prices in excess of average cost.
b) Oligopolies are able to capture economies of scale and they operate in an
environment that fosters technological change, which results in both the short-run and
long-run average costs being lower than for compettive firms. These lower costs lead
to lower prices.
2
Answer Key, Principles of Microeconomics, 8th Edition — Chapter 11
Answers to Connect Study Problems
1. a) See the following figure:
Figure 11.11 (Completed)
Moondance
cheat
stick to agreement
Cell A
stick to
agreement
Cell B
$120
$150
$120
$90
Sundance
Cell C
cheat
Cell D
$105
$90
$105
$150
b) They will choose option D because for each firm it is the best option. For
instance, Moondance will argue: “if Sundance sticks to the agreement, what’s my
best option? Answer: cheat ($150 compared to $120). On the other, if Sundance
cheats, what’s my best option? Answer: cheat ($105 compared to $90). So,
whatever Sundance does, my best option will be to cheat.” Sundance, will argue
likewise. So they will both end up cheating.
2. a) 60% The top 4 sales = $48 (18 + 12 + 10 + 8). Total sales in the industry = $80.
Concentration ratio = $48/$80 x 100 = 60%.
b) Oligopoly (higher than 40% is regarded as oligopolistic)
3. a) $12 (the price at the kink in the D curve)
b) 8 units produced
c) Yes since MC = MR
d) No, MC still = MR because the vertical MR curve is relevant
3
Answer Key, Principles of Microeconomics, 8th Edition — Chapter 11
4. a) See the following table:
Table 11.4 (Completed)
Quantity
0
1
2
3
4
5
6
7
8
Price
/
$64
62
60
58
56
54
52
50
b) Price: $52;
c)
TR
/
$64
124
180
232
280
324
364
400
MR
/
$64
60
56
52
48
44
40
36
TC
$122
154
184
216
250
286
324
364
406
MC
/
$32
30
32
34
36
38
40
42
AC
$154
92
72
62.5
57.2
54
52
50.75
output: 7 (Where MC =MR)
MC = MR = $40
d) AC = $52;
AR (= price) = $52
e) Rising Moon must be operating in a monopolistically competitive market and is
in long-run equilibrium. (This is because at the profit maximizing output, the firm
is just breaking even and unlike perfect competition the firm is facing a downwardsloping demand curve.)
5. a) Price: $60;
output: 800. (Where demand (D) = supply (MC)=60)
b) Price: $90; output: 400. (Where MR = MC. To find MR draw a line from a
price of $120 to quantity of 800.)
c) Price: $90; output of each firm: 100. (The same price as in b) with each firm
producing a quarter of the output in b).)
6. a) Quantity = 24.
(The chief will maximize her total revenue. This is achieved
where the MR = 0 and this occurs where the MR crosses the horizontal axis at
exactly half the distance from the D curve.)
b) Price = $6
(The quantity of 24 is extended up to the demand curve.)
c) MR = 0
d) Price = $6
(Since there are no costs, total revenue = total profit. Therefore, the
same answer as b).)
4
Answer Key, Principles of Microeconomics, 8th Edition — Chapter 11
7. a) output = 400
b) price = $40
(Where MC=MR.)
(Take a vertical line from the output of 400 up to the demand curve.)
c) excess capacity = 100 (minimum AC at output 500 less the 400 profit maximizing
output)
d) Yes
(This is because at an output of 400, the D=AR is greater than the average
cost.)
e) No since the presence of economic profits will lead to entry of new firms, a decrease
in price and shift to the left in the D curve)
8. a)
See the following table:
TABLE 11.5 (Completed)
Price
Quantity
$5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
.50
0
b) Price: $3;
output: 90
30
45
60
75
90
105
120
135
150
165
180
Total Revenue
=Total Profit
$150.00
202.50
240.00
262.50
270.00
262.50
240.00
202.50
150.00
82.50
0
(This is where total revenue is maximized.)
5
Answer Key, Principles of Microeconomics, 8th Edition — Chapter 11
c) See the following table:
TABLE 11.6 (Completed)
Price
$3.00
2.50
2.00
1.50
1.00
0.50
0
Quantity for
Tienshan
90
90
90
90
90
90
90
Quantity for
Endless
0
15
30
45
60
75
90
TR = TProfit for
Endless
0
$37.50
60.00
67.50
60.00
37.50
0
d) Output: 45;
new price: $1.50
(Tiensham will continue to produce 90- the
output from b). To find Endless’s output, 90 is deducted from the total demand.)
9. a) See the following figure”
FIGURE 11.16 (Completed)
b)
$560 (million)
(8x$70 – where D=S1)
c)
$660 (million)
(6x$110 – where D = S2)
6
Answer Key, Principles of Microeconomics, 8th Edition — Chapter 11
10. a) Price: $24;
point);
output: 240 (where MR will cut the horizontal axis at the mid-
total revenue: $5760 ($24 x 240)
b), c) d) and e)
See the following figure:
Figure 11.15 (completed)
c) If Ace increases his output by one-third (to 160) and Pace continues to sell 120, the
total output (280) can only be sold if the price falls to $20. Pace’s total revenue will
fall to $2400 (120 x $20) and Ace’s increase to $3200 (160 x $20). These amounts
are shown in the top right box of Figure 11.20 (Completed) above.
d) This is the same as c) with the positions reversed. The amounts are shown in the
bottom left box of the figure.
e) If they both cheat and increase their outputs to 160 each, the total output of 320 can
only be sold at a price of $16. The total revenue of each will be $2560 (160 x $16).
These amounts are shown in the bottom right box in the figure.
7
Answer Key, Principles of Microeconomics, 8th Edition — Chapter 11
Answer to Comprehensive Problem
a) See following figure:
Figure 11.19 (Completed)
b) Output = 80
(Where MC = MR)
from an output of 80 meets the demand curve.)
c) Total cost = $5600
Total revenue = $7200
Price = $90 (Where a vertical line
(80 x average cost of $70)
(80 x price of $90)
Economic profit = $1600 ($7200 - $5600)
d) Excess capacity = 20. (The difference between economic capacity of 100 – lowest AC
– and actual output of 80.)
e) (i) result in entry of new firms into the industry
making economic profit.)
f) (ii) shift to the left
8
(Because the average firm is