CHAPTER 11 - MONOPOLISTIC COMPETITION AND OLIGOPOLY
ANSWERS TO EVEN-NUMBERED PROBLEMS
2.
a.
Price per
Eye Exam
$100
Eye Exams
per Week
100
Total Cost
per Week
$10,500
Total Revenue
per Week
$10,000
$80
140
$10,800
$11,200
$60
200
$11,300
$12,000
$40
310
$12,290
$12,400
$20
550
$14,760
Marginal
Revenue
-$30
Marginal
Cost
-$7.50
$13.33
$8.33
$3.64
$9.00
-$5.83
$10.29
$11,000
b. An optometry practice might face a downward-sloping demand curve if it could
differentiate its product through location, hours of operation, ambiance, quality of service,
or frame selection.
c. The profit-maximizing price is $60 and the profit-maximizing number of eye exams per
week is 200.
4.
a.
Price per
Taco Plate
Taco Plates
per Week
Total Cost
per Week
$5
50
$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.
Chapter 11 Monopolistic Competition and Oligopoly
b.
Price per
Taco Plate
Taco Plates
per Week
Total Cost
per Week
$5
60
$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
$1.67
-$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. Firm suffering a loss and should shut down.
b.
Firm suffering a loss, but should continue to produce in the short run.
Chapter 11 Monopolistic Competition and Oligopoly
8.
Now we have:
Firm A: 35%
Firm B: 25%
Firm C: 15%
Firm D: 15%
Firm E: 10%
a. The 4-firm concentration ratio is 35% + 25% + 15% + 15% = 90%, same as in problem 7.
b. The 8-firm concentration ratio (with only 5 firms) is 35% + 25% + 15% + 15% + 10% =
100%, same as in problem 7.
c. The HHI is 352 + 252 + 152 + 152 + 102 = 2,400, larger than in problem 7.
d. The two concentration ratios are unchanged; the HHI grows as market share is more
concentrated among the largest firms.
10.
a. Before acquisition:
Verizon 33%
AT&T
Sprint
T-Mobile
31%
16%
10%
HHI = 332 + 312 + 162 + 102 = 2,406.
b. If the proposed acquisition were completed:
HHI = 332 + 412 + 162 = 3,026
c.
12.
Yes. As stated in the text (p. 330), government opposition can be presumed for any merger
that raises the HHI by more than 100 or to a value above 2,500.
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.
14.
As found in problem 12. with each selling 80 million, each earns a profit of $16 million. If,
say, Bole increases sales by another 20 million (to 100 million), price will fall another $0.05
to $0.30, profit per pound will fall to $0.15, and Bole’s total profit would be $0.15 x 100
million = $15 million, which is less than Bole was making before the further increase in sales.
Bole would have no incentive to cheat by another 20 million. And by similar logic, neither
would Bel Monte
Chapter 11 Monopolistic Competition and Oligopoly
MORE CHALLENGING QUESTIONS
16. 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.”