Self-Check Questions
The is an example of the application of to analysis of . It shows how, in certain situations, all sides can benefit from cooperative behavior rather than self-interested behavior. However, the challenge for the parties is to find ways to encourage cooperative behavior.
Self-Check Questions
1 . Suppose that, due to a successful campaign, a monopolistic competitor experiences an increase in for its product. How will that affect the it charges and the quantity it supplies? 2 . Continuing with the scenario in question 1, in the , the positive economic profits that the monopolistic competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original ’s profit, what will happen to the original ’s profit- maximizing and output levels? 3 . Consider the curve in the figure below, which shows the , , and curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs.
FIGURE 10.6 a. Suppose the firms collude to form a . What will the charge? What quantity will the supply? How much profit will the earn? b. Suppose now that the breaks up and the oligopolistic firms compete as vigorously as possible by cutting the and increasing sales. What will be the industry quantity and ? What will be the collective profits of all firms in the industry? c. Compare the , quantity, and profit for the and cutthroat competition outcomes. 4 . Sometimes oligopolies in the same industry are very different in size. Suppose we have a where one (Firm A) is large and the other firm (Firm B) is small, as the prisoner’s dilemma box in shows. B colludes with A B cheats by selling more output A colludes with B A gets $1,000, B gets $100 A gets $800, B gets $200 A cheats by selling more output A gets $1,050, B gets $50 A gets $500, B gets $20 TABLE 10.4 Assuming that both firms know the payoffs, what is the likely outcome in this case?
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?
Text from Principles of Microeconomics 3e, OpenStax, licensed CC BY-NC-SA 4.0. Access for free at openstax.org.
My notes
No notes yet on this page.