chapter 11 - monopolistic competition and oligopoly

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.”