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Economics Principles, Problems, and Policies

Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn

Chapter 11

Monopolistic Competition and Oligopoly - all with Video Answers

Educators

Chapter Questions

07:19

Problem 1

How does monopolistic competition differ from pure competition in its basic characteristics? From pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing a monopolistic competitor and how that, in turn, affects its economic profit.

Puneet Prajapati
Puneet Prajapati
Numerade Educator
04:10

Problem 2

Compare the elasticity of the monopolistic competitor's demand with that of a pure competitor and a pure monopolist. Assuming identical long-run costs, compare graphically the prices and outputs that would result in the long run under pure competition and under monopolistic competition. Contrast the two market structures in terms of productive and allocative efficiency. Explain: "Monopolistically competitive industries are characterized by too many firms, each of which produces too little."

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
05:24

Problem 3

"Monopolistic competition is monopolistic up to the point at which consumers become willing to buy close-substitute products and competitive beyond that point." Explain.

Puneet Prajapati
Puneet Prajapati
Numerade Educator
06:37

Problem 4

"Competition in quality and service may be just as effective as price competition in giving buyers more for their money." Do you agree? Why? Explain why monopolistically competitive firms frequently prefer nonprice competition to price competition.

Puneet Prajapati
Puneet Prajapati
Numerade Educator
05:46

Problem 5

Critically evaluate and explain:
a. In monopolistically competitive industries, economic profits are competed away in the long run; hence, there is no valid reason to criticize the performance and efficiency of such industries.
b. In the long run, monopolistic competition leads to a monopolistic price but not to monopolistic profits.

Puneet Prajapati
Puneet Prajapati
Numerade Educator
06:38

Problem 6

Why do oligopolies exist? List five or six oligopolists whose products you own or regularly purchase. What distinguishes oligopoly from monopolistic competition?

Puneet Prajapati
Puneet Prajapati
Numerade Educator
02:20

Problem 7

Answer the following questions, which relate to measures of concentration:
a. What is the meaning of a four-firm concentration ratio of 60 percent? 90 percent? What are the shortcomings of concentration ratios as measures of monopoly power?
b. Suppose that the five firms in industry A have annual sales of $30,30,20,10,$ and 10 percent of total industry sales. For the five firms in industry $\mathrm{B}$, the figures are 60 ,
$25,5,5,$ and 5 percent. Calculate the Herfindahl index for each industry and compare their likely competitiveness.

Nick Johnson
Nick Johnson
Numerade Educator
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Problem 8

Explain the general meaning of the following profit payoff matrix for oligopolists $\mathrm{C}$ and $\mathrm{D}$. All profit figures are in thousands.
(FIGURE CANNOT COPY)
a. Use the payoff matrix to explain the mutual interdependence that characterizes oligopolistic industries.
b. Assuming no collusion between $\mathrm{C}$ and $\mathrm{D},$ what is the likely pricing outcome?
c. In view of your answer to $8 b,$ explain why price collusion is mutually profitable. Why might there be a temptation to cheat on the collusive agreement?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
09:09

Problem 9

What assumptions about a rival's response to price changes underlie the kinked-demand curve for oligopolists? Why is there a gap in the oligopolist's marginalrevenue curve? How does the kinked-demand curve explain price rigidity in oligopoly? What are the shortcomings of the kinked-demand model?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
05:42

Problem 10

Why might price collusion occur in oligopolistic industries? Assess the economic desirability of collusive pricing. What are the main obstacles to collusion? Speculate as to why price leadership is legal in the United States, whereas pricefixing is not.

Puneet Prajapati
Puneet Prajapati
Numerade Educator
04:25

Problem 11

Why is there so much advertising in monopolistic competition and oligopoly? How does such advertising help consumers and promote efficiency? Why might it be excessive at times?

Puneet Prajapati
Puneet Prajapati
Numerade Educator
06:02

Problem 12

Construct a game-theory matrix involving two firms and their decisions on high versus low advertising budgets and the effects of each on profits. Show a circumstance in which both firms select high advertising budgets even though both would be more profitable with low advertising budgets. Why won't they unilaterally cut their advertising budgets?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
05:08

Problem 13

What firm dominates the U.S. beer industry? What demand and supply factors have contributed to "fewness" in this industry?

Puneet Prajapati
Puneet Prajapati
Numerade Educator