13 - Monopolistic Competition and Oligopoly

The illustration below shows the current market information for a price leadership model. The L subscript is used for the laree firm in the industr, S is for the small firms combined, and I is for the industry for a whole. On your graph label the following: Output for the industry (use QI), Output for the large firm (QL), output for the small firms (QS), price (P), and the profits for the large firm (shade the area in).

 

 

 

 

 

 

 

Answer to Question 1

Joe’s and Moe’s are tow competing gas stations in town. Both are considering adding a video game parlor to their stations. The payoff matrix below shows the expected daily profits for each gas station:

 

 

 

 

  1. Circle all the possible Nash equilibrium payoffs.
  2. If you were Moe and Joe decided to add a video game, would you add a video game or not add a video game? Explain your answer.
  3. If you were Joe, would you add video games, not add video games, or wait to see what Moe does? Explain your answer.

Answer to Question 2

Which features of a monopolistically competitive firm are similar to:

  1. the perfectly competitive firm
  2. the monopolist

Answer to Question 3

Suppose that you know that a firm in a monopolistically competitive industry is currently operating in the long-run. Draw the cost curves and revenue curves for this firm. Show the profit maximizing price and output level for the firm in the long-run. Make sure that you label your axis, curves, and all relevant information.

Answer to Question 4

Explain why zero economic profit is acceptable to a monopolistically competitive firm.

Answer to Question 5

Summarize the characteristics of the four market structures you’ve been studying by filling in the table below.

 

 

 

 

 

 

 

Answer to Question 6

True or False: Indicate whether each of the following statements is true or false.

  1. An oligopoly market will produce an output level that is greater than would be produced by a monopoly firm.
  2. Cartels are more likely to be stable when there are only a few firms in the industry.
  3. In monopolistic competition, the behavior of any one firm depends on the reaction it expects of all the others in the industry.
  4. In game theory, a dominant strategy is a strategy that is best given what the opposition does.
  5. In the kinked demand curve model, a change in marginal cost does not always lead to a change in optimal output.

Answer to Question 7

State whether each of the following is true, false, or uncertain.

  1. The fact that the behavior of one firm depends on the behavior of other firms is what differentiates oligopoly markets from the other market structures.
  2. A kinked demand curve describes a situation in which an oligopolist will be interested in maintaining the going price unless there is a rather large decrease in costs.
  3. Cartels are difficult to maintain in the long-run because it is more profitable for the industry to charge a lower price and produce more output.
  4. The practice of price leadership is usually based on a formal written agreement.
  5. Non-price competition is common in both monopolistically competitive firms and oligopolies.

Answer to Question 8

Solve the following game for its Nash Equilibrium. Circle all the Nash Equilibrium of the following game.

 

 

Answer to Question 9

Paul’s Pizza is thinking about using advertising to differentiate its pizza from all the other pizzas in town. An advertising agency has developed two possible campaigns: a small-scale campaign that will add $5 per hour to Paul’s costs and a larger campaign that will add $10 per hour to Paul’s costs. The agency also estimated the increases in demand it expects Paul’s Pizza to get from each campaign.

 

 

 

 

 

 

 

  1. Paul’s current profit-maximizing quantity is __________ pizza(s).
  2. His current profit-maximizing price is __________.
  3. At this quantity and price, Paul’s economic profit is ______________.
  1. Paul’s profit-maximizing quantity here is ___________ pizza(s).
  2. His profit-maximizing price is __________.
  3. At this quantity and price, Paul’s economic profit would be ______________.
  1. Paul’s profit-maximizing quantity here is ___________ pizza(s).
  2. His profit-maximizing price is __________.
  3. At this quantity and price, Paul’s economic profit would be ______________.
  4. If you were Paul, which campaign would you choose? Explain your answer.

Answer to Question 10

 
Joe’s Station
Add
Don’t Add
Moe’s Station Add
500, 200
300, 100
Don’t Add
350, 250
400, 180
Characteristic Perfect Competition Monopolistic Competition Oligopoly Monopoly
Number of Firms        
Type of Product        
Entry Conditions        
Efficiency        
Long-run Profits        
 
L
M
R
U
8,3
3,2
1,-1
D
4,1
2,0
1,4
Paul’s Pizza: Current Demand and Costs
Quantity
AC
MC
P
MR
1
26.50
12.50
12.00
12.00
2
16.25
6.00
11.00
10.00
3
11.50
2.00
10.00
8.00
4
9.25
2.50
9.00
6.00
5
8.00
3.00
8.00
4.00
6
7.25
3.50
7.00
2.00
7
6.79
4.00
6.00
0.00
8
6.50
4.50
5.00
-2.00
Paul’s Pizza: With Smaller Advertising Campaign
Quantity
AC
MC
P
MR
1
31.50
12.50
15.00
15.00
2
18.75
6.00
13.75
12.50
3
13.17
2.00
12.50
10.00
4
10.50
2.50
11.25
7.50
5
9.00
3.00
10.00
5.00
6
8.08
3.50
8.75
2.50
7
7.50
4.00
7.50
0.00
8
7.13
4.50
6.25
-2.50
Paul’s Pizza: With Larger Advertising Campaign
Quantity
AC
MC
P
MR
1
36.50
12.50
15.60
15.60
2
21.25
6.00
14.30
13.00
3
14.83
2.00
13.00
10.40
4
11.75
2.50
11.70
7.80
5
10.00
3.00
10.40
5.20
6
8.92
3.50
9.10
2.60
7
8.21
4.00
7.80
0.00
8
7.75
4.50
6.50
-2.60

 

[ WU Home ] [ Directory ] [ A-Z Index ] [ Sitemap ] [ Contact WU ] [ Statements & Disclosures ] [ Accessibility ] [ Search ]
© 2012 Washburn University, 1700 SW College Ave, Topeka, Kansas 66621 (785) 670-1010
Contact webmaster@washburn.edu with questions or comments.