CHAPTER 11 - MONOPOLISTIC COMPETITION AND OLIGOPOLY ANSWERS TO EVEN-NUMBERED PROBLEMS 2. Price MC P1 ATC E P2 D2 MR2 Q2 MR1 D1 Quantity Q1 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 $5 50 $30 4 3 2 1 80 150 800 1100 $50 $176 $1476 $2136 Total Revenue per Week $250 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. 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 1 960 1320 $1576 $2236 Marginal Revenue Marginal Cost $2.33 $0.55 $1.86 $1.50 $1.76 $1.67 -$1.67 $1.83 $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. Chapter 11 Monopolistic Competition and Oligopoly 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. Chapter 11 Monopolistic Competition and Oligopoly 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. Chapter 11 Monopolistic Competition and Oligopoly MORE CHALLENGING QUESTIONS 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.”
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