Problems
Review Questions
5 . What is the relationship between and ? 6 . How is the perceived for a monopolistically competitive different from the perceived for a or a perfectly competitive ? 7 . How does a monopolistic competitor choose its profit-maximizing quantity of output and ? 8 . How can a monopolistic competitor tell whether the it is charging will cause the to earn profits or experience losses? 9 . If the firms in a monopolistically competitive are earning economic profits or losses in the , would you expect them to continue doing so in the long run? Why? 10 . Is a monopolistically competitive firm productively efficient? Is it allocatively efficient? Why or why not? 11 . Will the firms in an oligopoly act more like a monopoly or more like competitors? Briefly explain. 12 . Does each individual in a prisoner’s dilemma benefit more from cooperation or from pursuing self- interest? Explain briefly. 13 . What stops oligopolists from acting together as a monopolist and earning the highest possible level of profits?
Critical Thinking Questions
14 . Aside from , how can monopolistically competitive firms increase for their products? 15 . Make a case for why monopolistically competitive industries never reach . 16 . Would you rather have efficiency or variety? That is, one of the variety of products we have is that each product costs more per unit than if there were only one kind of product of a given type, like shoes. Perhaps a better question is, “What is the right amount of variety? Can there be too many varieties of shoes, for example?” 17 . Would you expect the to be more extreme (like a right angle) or less extreme (like a normal ) if each in the produces a near-identical product like OPEC and petroleum? What if each produces a somewhat different product? Explain your reasoning. 18 . When OPEC raised the of oil dramatically in the mid-1970s, experts said it was unlikely that the could stay together over the long term—that the incentives for individual members to cheat would become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.
Problems
19 . Andrea’s Day Spa began to offer a relaxing aromatherapy treatment. The asks you how much to charge to maximize profits. The first two columns in provide the and quantity for the for treatments. The third column shows its total costs. For each level of output, calculate total , , average cost, and . What is the profit-maximizing level of output for the treatments and how much will the earn in profits? Quantity TC $25.00 0 $130 $24.00 10 $275 $23.00 20 $435 $22.50 30 $610 $22.00 40 $800 $21.60 50 $1,005 $21.20 60 $1,225 TABLE 10.5 20 . Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the of the corn. If they work independently, they will each earn $100. If they decide to work together and both lower their output, they can each earn $150. If one person lowers output and the other does not, the person who lowers output will earn $0 and the other person will capture the entire and will earn $200. represents the choices available to Mary and Raj. What is the best choice for Raj if he is sure that Mary will cooperate? If Mary thinks Raj will cheat, what should Mary do and why? What is the result? What is the preferred choice if they could ensure cooperation? A = Work independently; B = Cooperate and Lower Output. (Each results lists Raj’s earnings first, and Mary's earnings second.) Mary A B A ($100, $100) ($200, $0) Raj B ($0, $200) ($150, $150) TABLE 10.6 21 . Jane and Bill are apprehended for a bank robbery. They are taken into separate rooms and questioned by the police about their involvement in the crime. The police tell them each that if they confess and turn the other person in, they will receive a lighter sentence. If they both confess, they will be each be sentenced to 30 years. If neither confesses, they will each receive a 20-year sentence. If only one confesses, the confessor will receive 15 years and the one who stayed silent will receive 35 years. below represents the choices available to Jane and Bill. If Jane trusts Bill to stay silent, what should she do? If Jane thinks that Bill will confess, what should she do? Does Jane have a dominant strategy? Does Bill have a dominant strategy? A = Confess; B = Stay Silent. (Each results lists Jane’s sentence first (in years), and Bill's sentence second.) Jane A B A (30, 30) (15, 35) Bill B (35, 15) (20, 20) TABLE 10.7
FIGURE 11.1Oligopoly versus Competitors in the Marketplace Large corporations, such as the natural gas producer Kinder Morgan, can bring to the marketplace. Will that benefit consumers, or is more competition better? (Credit: modification of “Aerial view of Kinder Morgan Brisbane Terminal” by Chiara Coetzee/ Flickr Creative Commons, Public Domain)
In this chapter, you will learn about:
- Corporate Mergers
- Regulating Anticompetitive Behavior
- Regulating Natural Monopolies
- The Great Experiment
BRING IT HOME More than Cooking, Heating, and Cooling If you live in the United States, there is a slightly better than 50–50 chance your home is heated and cooled using natural gas. You may even use natural gas for cooking. However, those uses are not the primary uses of natural gas in the U.S. In late 2021, according to the U.S. Energy Information Administration, home heating, cooling, and cooking accounted for nearly 20% of natural gas usage. What accounts for the rest? The greatest uses for natural gas are the generation of electric power (almost 37%) and in industry (30%). Together these three uses for natural gas touch many areas of our lives, so why would there be any opposition to a of two natural gas firms? After all, a could mean increased efficiencies and reduced costs to people like you and me. In October 2011, Kinder Morgan and El Paso , two natural gas firms, announced they were merging. The announcement stated the combined would link “nearly every major region with markets,” cut costs by “eliminating duplication in pipelines and other assets,” and that “the savings could be passed on to consumers.” The objection? The $21.1 billion deal would give Kinder Morgan control of more than 80,000 miles of pipeline, making the new the third largest energy producer in North America. Policymakers and the public wondered
Text from Principles of Microeconomics 3e, OpenStax, licensed CC BY-NC-SA 4.0. Access for free at openstax.org.
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