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Principles of Microeconomics for APĀ® Courses

Steven A. Greenlaw, David Shapiro, Timothy Taylor

Chapter 10

Monopolistic Competition and Oligopoly - all with Video Answers

Educators

Chapter Questions

02:58

Problem 1

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

Daniel Cisneros
Daniel Cisneros
Numerade Educator
03:20

Problem 2

Continuing with the scenario in question $1,$ in the long run, the positive economic profits that the monopolistim competitor earns will attract a response either from existing firms in the industry or firms outside. As those firm capture the original firm's profit, what will happen to the original firm's profit-maximizing price and output levels?

Mihir Nayar
Mihir Nayar
Numerade Educator
03:24

Problem 3

Consider the curve in Figure $10.6,$ which shows the market demand, marginal cost, and marginal revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs.

Daniel Cisneros
Daniel Cisneros
Numerade Educator
02:13

Problem 4

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm $($ Firm $A)$ is large and the other firm $($ Firm $B)$ is small, as the prisoner's dilemma box in Table 10.4 shows.

Mihir Nayar
Mihir Nayar
Numerade Educator
01:42

Problem 5

What is the relationship between product differentiation and monopolistic competition?

Daniel Cisneros
Daniel Cisneros
Numerade Educator
01:58

Problem 6

How is the perceived demand curve for a monopolistically competitive firm different from the
perceived demand curve for a monopoly or a perfectly competitive firm?

Mihir Nayar
Mihir Nayar
Numerade Educator
00:56

Problem 7

How does a monopolistic competitor choose its profit-maximizing quantity of output and price?

Daniel Cisneros
Daniel Cisneros
Numerade Educator
01:57

Problem 8

How can a monopolistic competitor tell whether the price it is charging will cause the firm to earn profits or experience losses?

Mihir Nayar
Mihir Nayar
Numerade Educator
02:43

Problem 9

If the firms in a monopolistically competitive market are earning economic profits or losses in the short run, would you expect them to continue doing so in the long run? Why?

Daniel Cisneros
Daniel Cisneros
Numerade Educator
03:07

Problem 10

Is a monopolistically competitive firm productively efficient? Is it allocatively efficient? Why or why not?

Mihir Nayar
Mihir Nayar
Numerade Educator
01:09

Problem 11

Will the firms in an oligopoly act more like a monopoly or more like competitors? Briefly explain.

Daniel Cisneros
Daniel Cisneros
Numerade Educator
02:18

Problem 12

Does each individual in a prisoner's dilemma benefit more from cooperation or from pursuing self-
interest? Explain briefly.

Mihir Nayar
Mihir Nayar
Numerade Educator
03:20

Problem 13

What stops oligopolists from acting together as a monopolist and earning the highest possible level of
profits?

Daniel Cisneros
Daniel Cisneros
Numerade Educator
04:34

Problem 14

Aside from advertising, how can monopolistically competitive firms increase demand for their products?

Mihir Nayar
Mihir Nayar
Numerade Educator
02:02

Problem 15

Make a case for why monopolistically competitive industries never reach long-run equilibrium.

Daniel Cisneros
Daniel Cisneros
Numerade Educator
06:53

Problem 16

Would you rather have efficiency or variety? That is, one opportunity cost 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?"

Mihir Nayar
Mihir Nayar
Numerade Educator
00:37

Problem 17

Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a
normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different product? Explain your reasoning.

Daniel Cisneros
Daniel Cisneros
Numerade Educator
06:13

Problem 18

When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the
cartel 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.

Mihir Nayar
Mihir Nayar
Numerade Educator
11:38

Problem 19

Andrea's Day Spa began to offer a relaxing aromatherapy treatment. The firm asks you how much
to charge to maximize profits. The first two columns in Table 10.5 provide the price and quantity for the
demand curve for treatments. The third column shows its total costs. For each level of output, calculate total revenue, marginal revenue, average cost, and marginal cost. What is the profit-maximizing level of output for the treatments and how much will the firm earn in orofits?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
03:01

Problem 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 price of the corn. If they work independently, they will each earn $\$ 100$ . If they decide to work together and both lower their output, and the other does not, the person who lowers output will earn $\$ 0$ and the other person will capture the entire market and will earn $\$ 200$ . Table 10.6 represents the choices available to Mary and Raj. What is the bestchoice 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 prisoner's dilemma result? What is the preferred choice if they could ensure cooperation? A $=$ Work independently; $\mathrm{B}=$ Cooperate and Lower Output. (Each results entry lists Raj's earnings first, and Mary's
earnings second.)

Natalie Britton
Natalie Britton
Numerade Educator
01:45

Problem 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 turm 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. Table 10.7 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? $\mathrm{A}=$ Confess; $\mathrm{B}=$ Stay Silent. (Each results entry lists Jane's sentence first (in years), and Bill's sentence
second.)

Daniel Cisneros
Daniel Cisneros
Numerade Educator