ECON 210 Monopolistic Competition, Oligopoly, and Game Theory (solutions)

1. Conditions for monopolistic competition

Consider the monopolistically competitive market structure, which has some features of a competitive market and some features of a monopoly.

Complete the following table by indicating whether each attribute characterizes a competitive market, a monopolistically competitive market, both, or

neither. Check all that apply.

2. How short run profit or losses induce entry or exit Fantastique Bikes is a company that manufactures bikes in a monopolistically competitive market. The following graph shows Fantastique’s demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). Place the black point (plus symbol) on the graph to indicate the shortrun profit maximizing price and quantity for this monopolistically competitive company. Then, use the green rectangle (triangle symbols) to shade the area representing the company’s profit or loss

Which of the following statements are true about a competitive pricesearcher market? Check all that apply

3. Entry and exit in the long run Suppose that car manufacturers in a competitive price searcher market earn negative profits in the short run. In this scenario, there are more manufacturers in the industry than there would be in long run equilibrium

 

Which of the following statements are true about a competitive pricesearcher market? Check all that apply

4. Understanding excess capacity The following table shows the daily cost data and demand schedule for a typical firm producing board games in a monopolistically competitive market in the short run. Fill in the values in the Marginal Cost, Total Revenue, and Marginal Revenue columns in the following table and then answer the questions that follow

Fill in the Average Total Cost column in the previous table.

Based on your calculations, the level of excess capacity in this monopolistically competitive market is

5. Is monopolistic competition efficient? Suppose that a firm produces polo shirts in a monopolistically competitive market. The following graph shows its demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Place a black point (plus symbol) on the graph to indicate the longrun monopolistically competitive equilibrium price and quantity for this firm. Next, place a grey point (star symbol) to indicate the minimum average total cost the firm faces and the quantity associated with that cost

True or False: This indicates that there is no markup on marginal cost in the market for shirts

6. Characteristics of oligopoly

An oligopolistic market structure is distinguished by several characteristics, one of which is either homogeneous or differentiated products. What are some other characteristics of this market structure? Check all that apply

7. Interpreting concentration ratios

The following table shows the fourfirm

concentration ratios of various industries.

Industry FourFirm

Concentration Ratio

Aerospace products and parts 55.6

Cigarettes 98.9

Greeting cards 80

Petroleum and coal products 34.1

Breakfast cereals 85

Based on the data presented in the table, which of the following industries is the closest to perfect competition?

8. Deviating from the collusive outcome Mays and McCovey are beerbrewing companies that operate in a duopoly (twofirm oligopoly). The daily marginal cost ( ) of producing a can of beer is constant and equals $0.60 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost ( ) for each firm. Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.) Place the black point (plus symbol) on the following graph to indicate the profitmaximizing price and combined quantity of output if Mays and McCovey choose to work together

9. Breakdown of a cartel agreement Consider a town in which only two residents, Charles and Dina, own wells that produce water safe for drinking. Charles and Dina can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water

Suppose Charles and Dina form a cartel and behave as a monopolist. The profitmaximizing price is per gallon, and the total output is gallons. As part of their cartel agreement, Charles and Dina agree to split production equally. Therefore, Charles's profit is , and Dina's profit is

Suppose that Charles and Dina have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Charles says to himself, "Dina and I aren't the best of friends anyway. If I increase my production to 35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Charles implements his new plan, the price of water decreases to per gallon. Given Dina and Charles's production levels, Charles's profit becomes and Dina's profit becomes

10. Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell Bluray players, Movietonia and Videotech. The following payoff matrix shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its players

For example, the lower, left cell shows that if Movietonia prices low and Videotech prices high, Movietonia will earn a profit of $15 million and Videotech will earn a profit of $2 million. Assume this is a simultaneous game and that Movietonia and Videotech are both profitmaximizing firms. If Movietonia prices high, Videotech will make more profit if it chooses a low price, and if Movietonia prices low, Videotech will make more profit if it chooses a low price

11. Contestable markets

True or False: If a firm is operating in a contestable market, it should operate at the efficient production level and earn negative profit

The contestable market model has important policy implications. If there is concern that a market is not sufficiently competitive, what can policymakers do to increase competition in a given industry? Check all that apply

12. Market structures For each of the following scenarios, determine which market model best describes the scenario. Then identify the number of firms, the type of product, and the ease with which new firms can enter the market under this market structure

13. Comparing different market structures

In which of the following market structures do firms produce at an output level that is both resource allocative efficient and productive efficient

14. To advertise or not to advertise

Suppose that Creamland and Dairy King are the only two firms that sell ice cream. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises

For example, the upper right cell shows that if Creamland advertises and Dairy King doesn't advertise, Creamland will make a profit of $18 million, and Dairy King will make a profit of $2 million. Assume this is a simultaneous game and that Creamland and Dairy King are both profit maximizing firms. If Creamland decides to advertise, it will earn a profit of million if Dairy King advertises and a profit of million if Dairy King does not advertise

If Creamland decides not to advertise, it will earn a profit of million if Dairy King advertises and a profit of million if Dairy King does not advertise

If Dairy King advertises, Creamland makes a higher profit if it chooses

Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing

Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing

 

1. Conditions for monopolistic competition

Consider the monopolistically competitive market structure, which has some features of a competitive market and some features of a monopoly.

Complete the following table by indicating whether each attribute characterizes a competitive market, a monopolistically competitive market, both, or

neither. Check all that apply.

2. How short run profit or losses induce entry or exit Fantastique Bikes is a company that manufactures bikes in a monopolistically competitive market. The following graph shows Fantastique’s demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). Place the black point (plus symbol) on the graph to indicate the shortrun profit maximizing price and quantity for this monopolistically competitive company. Then, use the green rectangle (triangle symbols) to shade the area representing the company’s profit or loss

Which of the following statements are true about a competitive pricesearcher market? Check all that apply

3. Entry and exit in the long run Suppose that car manufacturers in a competitive price searcher market earn negative profits in the short run. In this scenario, there are more manufacturers in the industry than there would be in long run equilibrium

 

Which of the following statements are true about a competitive pricesearcher market? Check all that apply

4. Understanding excess capacity The following table shows the daily cost data and demand schedule for a typical firm producing board games in a monopolistically competitive market in the short run. Fill in the values in the Marginal Cost, Total Revenue, and Marginal Revenue columns in the following table and then answer the questions that follow

Fill in the Average Total Cost column in the previous table.

Based on your calculations, the level of excess capacity in this monopolistically competitive market is

5. Is monopolistic competition efficient? Suppose that a firm produces polo shirts in a monopolistically competitive market. The following graph shows its demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Place a black point (plus symbol) on the graph to indicate the longrun monopolistically competitive equilibrium price and quantity for this firm. Next, place a grey point (star symbol) to indicate the minimum average total cost the firm faces and the quantity associated with that cost

True or False: This indicates that there is no markup on marginal cost in the market for shirts

6. Characteristics of oligopoly

An oligopolistic market structure is distinguished by several characteristics, one of which is either homogeneous or differentiated products. What are some other characteristics of this market structure? Check all that apply

7. Interpreting concentration ratios

The following table shows the fourfirm

concentration ratios of various industries.

Industry FourFirm

Concentration Ratio

Aerospace products and parts 55.6

Cigarettes 98.9

Greeting cards 80

Petroleum and coal products 34.1

Breakfast cereals 85

Based on the data presented in the table, which of the following industries is the closest to perfect competition?

8. Deviating from the collusive outcome Mays and McCovey are beerbrewing companies that operate in a duopoly (twofirm oligopoly). The daily marginal cost ( ) of producing a can of beer is constant and equals $0.60 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost ( ) for each firm. Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.) Place the black point (plus symbol) on the following graph to indicate the profitmaximizing price and combined quantity of output if Mays and McCovey choose to work together

9. Breakdown of a cartel agreement Consider a town in which only two residents, Charles and Dina, own wells that produce water safe for drinking. Charles and Dina can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water

Suppose Charles and Dina form a cartel and behave as a monopolist. The profitmaximizing price is per gallon, and the total output is gallons. As part of their cartel agreement, Charles and Dina agree to split production equally. Therefore, Charles's profit is , and Dina's profit is

Suppose that Charles and Dina have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Charles says to himself, "Dina and I aren't the best of friends anyway. If I increase my production to 35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Charles implements his new plan, the price of water decreases to per gallon. Given Dina and Charles's production levels, Charles's profit becomes and Dina's profit becomes

10. Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell Bluray players, Movietonia and Videotech. The following payoff matrix shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its players

For example, the lower, left cell shows that if Movietonia prices low and Videotech prices high, Movietonia will earn a profit of $15 million and Videotech will earn a profit of $2 million. Assume this is a simultaneous game and that Movietonia and Videotech are both profitmaximizing firms. If Movietonia prices high, Videotech will make more profit if it chooses a low price, and if Movietonia prices low, Videotech will make more profit if it chooses a low price

11. Contestable markets

True or False: If a firm is operating in a contestable market, it should operate at the efficient production level and earn negative profit

The contestable market model has important policy implications. If there is concern that a market is not sufficiently competitive, what can policymakers do to increase competition in a given industry? Check all that apply

12. Market structures For each of the following scenarios, determine which market model best describes the scenario. Then identify the number of firms, the type of product, and the ease with which new firms can enter the market under this market structure

13. Comparing different market structures

In which of the following market structures do firms produce at an output level that is both resource allocative efficient and productive efficient

14. To advertise or not to advertise

Suppose that Creamland and Dairy King are the only two firms that sell ice cream. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises

For example, the upper right cell shows that if Creamland advertises and Dairy King doesn't advertise, Creamland will make a profit of $18 million, and Dairy King will make a profit of $2 million. Assume this is a simultaneous game and that Creamland and Dairy King are both profit maximizing firms. If Creamland decides to advertise, it will earn a profit of million if Dairy King advertises and a profit of million if Dairy King does not advertise

If Creamland decides not to advertise, it will earn a profit of million if Dairy King advertises and a profit of million if Dairy King does not advertise

If Dairy King advertises, Creamland makes a higher profit if it chooses

Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing

Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing

 

1. Conditions for monopolistic competition

Consider the monopolistically competitive market structure, which has some features of a competitive market and some features of a monopoly.

Complete the following table by indicating whether each attribute characterizes a competitive market, a monopolistically competitive market, both, or

neither. Check all that apply.

2. How short run profit or losses induce entry or exit Fantastique Bikes is a company that manufactures bikes in a monopolistically competitive market. The following graph shows Fantastique’s demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). Place the black point (plus symbol) on the graph to indicate the shortrun profit maximizing price and quantity for this monopolistically competitive company. Then, use the green rectangle (triangle symbols) to shade the area representing the company’s profit or loss

Which of the following statements are true about a competitive pricesearcher market? Check all that apply

3. Entry and exit in the long run Suppose that car manufacturers in a competitive price searcher market earn negative profits in the short run. In this scenario, there are more manufacturers in the industry than there would be in long run equilibrium

 

Which of the following statements are true about a competitive pricesearcher market? Check all that apply

4. Understanding excess capacity The following table shows the daily cost data and demand schedule for a typical firm producing board games in a monopolistically competitive market in the short run. Fill in the values in the Marginal Cost, Total Revenue, and Marginal Revenue columns in the following table and then answer the questions that follow

Fill in the Average Total Cost column in the previous table.

Based on your calculations, the level of excess capacity in this monopolistically competitive market is

5. Is monopolistic competition efficient? Suppose that a firm produces polo shirts in a monopolistically competitive market. The following graph shows its demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Place a black point (plus symbol) on the graph to indicate the longrun monopolistically competitive equilibrium price and quantity for this firm. Next, place a grey point (star symbol) to indicate the minimum average total cost the firm faces and the quantity associated with that cost

True or False: This indicates that there is no markup on marginal cost in the market for shirts

6. Characteristics of oligopoly

An oligopolistic market structure is distinguished by several characteristics, one of which is either homogeneous or differentiated products. What are some other characteristics of this market structure? Check all that apply

7. Interpreting concentration ratios

The following table shows the fourfirm

concentration ratios of various industries.

Industry FourFirm

Concentration Ratio

Aerospace products and parts 55.6

Cigarettes 98.9

Greeting cards 80

Petroleum and coal products 34.1

Breakfast cereals 85

Based on the data presented in the table, which of the following industries is the closest to perfect competition?

8. Deviating from the collusive outcome Mays and McCovey are beerbrewing companies that operate in a duopoly (twofirm oligopoly). The daily marginal cost ( ) of producing a can of beer is constant and equals $0.60 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost ( ) for each firm. Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.) Place the black point (plus symbol) on the following graph to indicate the profitmaximizing price and combined quantity of output if Mays and McCovey choose to work together

9. Breakdown of a cartel agreement Consider a town in which only two residents, Charles and Dina, own wells that produce water safe for drinking. Charles and Dina can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water

Suppose Charles and Dina form a cartel and behave as a monopolist. The profitmaximizing price is per gallon, and the total output is gallons. As part of their cartel agreement, Charles and Dina agree to split production equally. Therefore, Charles's profit is , and Dina's profit is

Suppose that Charles and Dina have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Charles says to himself, "Dina and I aren't the best of friends anyway. If I increase my production to 35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Charles implements his new plan, the price of water decreases to per gallon. Given Dina and Charles's production levels, Charles's profit becomes and Dina's profit becomes

10. Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell Bluray players, Movietonia and Videotech. The following payoff matrix shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its players

For example, the lower, left cell shows that if Movietonia prices low and Videotech prices high, Movietonia will earn a profit of $15 million and Videotech will earn a profit of $2 million. Assume this is a simultaneous game and that Movietonia and Videotech are both profitmaximizing firms. If Movietonia prices high, Videotech will make more profit if it chooses a low price, and if Movietonia prices low, Videotech will make more profit if it chooses a low price

11. Contestable markets

True or False: If a firm is operating in a contestable market, it should operate at the efficient production level and earn negative profit

The contestable market model has important policy implications. If there is concern that a market is not sufficiently competitive, what can policymakers do to increase competition in a given industry? Check all that apply

12. Market structures For each of the following scenarios, determine which market model best describes the scenario. Then identify the number of firms, the type of product, and the ease with which new firms can enter the market under this market structure

13. Comparing different market structures

In which of the following market structures do firms produce at an output level that is both resource allocative efficient and productive efficient

14. To advertise or not to advertise

Suppose that Creamland and Dairy King are the only two firms that sell ice cream. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises

For example, the upper right cell shows that if Creamland advertises and Dairy King doesn't advertise, Creamland will make a profit of $18 million, and Dairy King will make a profit of $2 million. Assume this is a simultaneous game and that Creamland and Dairy King are both profit maximizing firms. If Creamland decides to advertise, it will earn a profit of million if Dairy King advertises and a profit of million if Dairy King does not advertise

If Creamland decides not to advertise, it will earn a profit of million if Dairy King advertises and a profit of million if Dairy King does not advertise

If Dairy King advertises, Creamland makes a higher profit if it chooses

Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing

Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing

 

1. Conditions for monopolistic competition 1. Conditions for monopolistic competition

Consider the monopolistically competitive market structure, which has some features of a competitive market and some features of a monopoly. Consider the monopolistically competitive market structure, which has some features of a competitive market and some features of a monopoly.

Complete the following table by indicating whether each attribute characterizes a competitive market, a monopolistically competitive market, both, or Complete the following table by indicating whether each attribute characterizes a competitive market, a monopolistically competitive market, both, or

neither. Check all that apply. neither. Check all that apply.

2. How short run profit or losses induce entry or exit Fantastique Bikes is a company that manufactures bikes in a monopolistically competitive market. The following graph shows Fantastique’s demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). Place the black point (plus symbol) on the graph to indicate the shortrun profit maximizing price and quantity for this monopolistically competitive company. Then, use the green rectangle (triangle symbols) to shade the area representing the company’s profit or loss 2. How short run profit or losses induce entry or exit Fantastique Bikes is a company that manufactures bikes in a monopolistically competitive market. The following graph shows Fantastique’s demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). Place the black point (plus symbol) on the graph to indicate the shortrun profit maximizing price and quantity for this monopolistically competitive company. Then, use the green rectangle (triangle symbols) to shade the area representing the company’s profit or loss

Which of the following statements are true about a competitive pricesearcher market? Check all that apply Which of the following statements are true about a competitive pricesearcher market? Check all that apply

3. Entry and exit in the long run Suppose that car manufacturers in a competitive price searcher market earn negative profits in the short run. In this scenario, there are more manufacturers in the industry than there would be in long run equilibrium 3. Entry and exit in the long run Suppose that car manufacturers in a competitive price searcher market earn negative profits in the short run. In this scenario, there are more manufacturers in the industry than there would be in long run equilibrium

 

Which of the following statements are true about a competitive pricesearcher market? Check all that apply Which of the following statements are true about a competitive pricesearcher market? Check all that apply

4. Understanding excess capacity The following table shows the daily cost data and demand schedule for a typical firm producing board games in a monopolistically competitive market in the short run. Fill in the values in the Marginal Cost, Total Revenue, and Marginal Revenue columns in the following table and then answer the questions that follow 4. Understanding excess capacity The following table shows the daily cost data and demand schedule for a typical firm producing board games in a monopolistically competitive market in the short run. Fill in the values in the Marginal Cost, Total Revenue, and Marginal Revenue columns in the following table and then answer the questions that follow

Fill in the Average Total Cost column in the previous table. Fill in the Average Total Cost column in the previous table.

Based on your calculations, the level of excess capacity in this monopolistically competitive market is Based on your calculations, the level of excess capacity in this monopolistically competitive market is

5. Is monopolistic competition efficient? Suppose that a firm produces polo shirts in a monopolistically competitive market. The following graph shows its demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Place a black point (plus symbol) on the graph to indicate the longrun monopolistically competitive equilibrium price and quantity for this firm. Next, place a grey point (star symbol) to indicate the minimum average total cost the firm faces and the quantity associated with that cost 5. Is monopolistic competition efficient? Suppose that a firm produces polo shirts in a monopolistically competitive market. The following graph shows its demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Place a black point (plus symbol) on the graph to indicate the longrun monopolistically competitive equilibrium price and quantity for this firm. Next, place a grey point (star symbol) to indicate the minimum average total cost the firm faces and the quantity associated with that cost

True or False: This indicates that there is no markup on marginal cost in the market for shirts True or False: This indicates that there is no markup on marginal cost in the market for shirts

6. Characteristics of oligopoly 6. Characteristics of oligopoly

An oligopolistic market structure is distinguished by several characteristics, one of which is either homogeneous or differentiated products. What are some other characteristics of this market structure? Check all that apply An oligopolistic market structure is distinguished by several characteristics, one of which is either homogeneous or differentiated products. What are some other characteristics of this market structure? Check all that apply

7. Interpreting concentration ratios 7. Interpreting concentration ratios

The following table shows the fourfirm The following table shows the fourfirm

concentration ratios of various industries. concentration ratios of various industries.

Industry FourFirm Industry FourFirm

Concentration Ratio Concentration Ratio

Aerospace products and parts 55.6 Aerospace products and parts 55.6

Cigarettes 98.9 Cigarettes 98.9

Greeting cards 80 Greeting cards 80

Petroleum and coal products 34.1 Petroleum and coal products 34.1

Breakfast cereals 85 Breakfast cereals 85

Based on the data presented in the table, which of the following industries is the closest to perfect competition? Based on the data presented in the table, which of the following industries is the closest to perfect competition?

8. Deviating from the collusive outcome Mays and McCovey are beerbrewing companies that operate in a duopoly (twofirm oligopoly). The daily marginal cost ( ) of producing a can of beer is constant and equals $0.60 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost ( ) for each firm. Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.) Place the black point (plus symbol) on the following graph to indicate the profitmaximizing price and combined quantity of output if Mays and McCovey choose to work together 8. Deviating from the collusive outcome Mays and McCovey are beerbrewing companies that operate in a duopoly (twofirm oligopoly). The daily marginal cost ( ) of producing a can of beer is constant and equals $0.60 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost ( ) for each firm. Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.) Place the black point (plus symbol) on the following graph to indicate the profitmaximizing price and combined quantity of output if Mays and McCovey choose to work together

9. Breakdown of a cartel agreement Consider a town in which only two residents, Charles and Dina, own wells that produce water safe for drinking. Charles and Dina can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water 9. Breakdown of a cartel agreement Consider a town in which only two residents, Charles and Dina, own wells that produce water safe for drinking. Charles and Dina can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water

Suppose Charles and Dina form a cartel and behave as a monopolist. The profitmaximizing price is per gallon, and the total output is gallons. As part of their cartel agreement, Charles and Dina agree to split production equally. Therefore, Charles's profit is , and Dina's profit is Suppose Charles and Dina form a cartel and behave as a monopolist. The profitmaximizing price is per gallon, and the total output is gallons. As part of their cartel agreement, Charles and Dina agree to split production equally. Therefore, Charles's profit is , and Dina's profit is

Suppose that Charles and Dina have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Charles says to himself, "Dina and I aren't the best of friends anyway. If I increase my production to 35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Charles implements his new plan, the price of water decreases to per gallon. Given Dina and Charles's production levels, Charles's profit becomes and Dina's profit becomes Suppose that Charles and Dina have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Charles says to himself, "Dina and I aren't the best of friends anyway. If I increase my production to 35 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow." After Charles implements his new plan, the price of water decreases to per gallon. Given Dina and Charles's production levels, Charles's profit becomes and Dina's profit becomes

10. Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell Bluray players, Movietonia and Videotech. The following payoff matrix shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its players 10. Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell Bluray players, Movietonia and Videotech. The following payoff matrix shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its players

For example, the lower, left cell shows that if Movietonia prices low and Videotech prices high, Movietonia will earn a profit of $15 million and Videotech will earn a profit of $2 million. Assume this is a simultaneous game and that Movietonia and Videotech are both profitmaximizing firms. If Movietonia prices high, Videotech will make more profit if it chooses a low price, and if Movietonia prices low, Videotech will make more profit if it chooses a low price For example, the lower, left cell shows that if Movietonia prices low and Videotech prices high, Movietonia will earn a profit of $15 million and Videotech will earn a profit of $2 million. Assume this is a simultaneous game and that Movietonia and Videotech are both profitmaximizing firms. If Movietonia prices high, Videotech will make more profit if it chooses a low price, and if Movietonia prices low, Videotech will make more profit if it chooses a low price

11. Contestable markets 11. Contestable markets

True or False: If a firm is operating in a contestable market, it should operate at the efficient production level and earn negative profit True or False: If a firm is operating in a contestable market, it should operate at the efficient production level and earn negative profit

The contestable market model has important policy implications. If there is concern that a market is not sufficiently competitive, what can policymakers do to increase competition in a given industry? Check all that apply The contestable market model has important policy implications. If there is concern that a market is not sufficiently competitive, what can policymakers do to increase competition in a given industry? Check all that apply

12. Market structures For each of the following scenarios, determine which market model best describes the scenario. Then identify the number of firms, the type of product, and the ease with which new firms can enter the market under this market structure 12. Market structures For each of the following scenarios, determine which market model best describes the scenario. Then identify the number of firms, the type of product, and the ease with which new firms can enter the market under this market structure

13. Comparing different market structures 13. Comparing different market structures

In which of the following market structures do firms produce at an output level that is both resource allocative efficient and productive efficient In which of the following market structures do firms produce at an output level that is both resource allocative efficient and productive efficient

14. To advertise or not to advertise 14. To advertise or not to advertise

Suppose that Creamland and Dairy King are the only two firms that sell ice cream. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises Suppose that Creamland and Dairy King are the only two firms that sell ice cream. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises

For example, the upper right cell shows that if Creamland advertises and Dairy King doesn't advertise, Creamland will make a profit of $18 million, and Dairy King will make a profit of $2 million. Assume this is a simultaneous game and that Creamland and Dairy King are both profit maximizing firms. If Creamland decides to advertise, it will earn a profit of million if Dairy King advertises and a profit of million if Dairy King does not advertise For example, the upper right cell shows that if Creamland advertises and Dairy King doesn't advertise, Creamland will make a profit of $18 million, and Dairy King will make a profit of $2 million. Assume this is a simultaneous game and that Creamland and Dairy King are both profit maximizing firms. If Creamland decides to advertise, it will earn a profit of million if Dairy King advertises and a profit of million if Dairy King does not advertise

If Creamland decides not to advertise, it will earn a profit of million if Dairy King advertises and a profit of million if Dairy King does not advertise If Creamland decides not to advertise, it will earn a profit of million if Dairy King advertises and a profit of million if Dairy King does not advertise

If Dairy King advertises, Creamland makes a higher profit if it chooses If Dairy King advertises, Creamland makes a higher profit if it chooses

Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing

Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing

 

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