Exam 11: Monopolistic Competition and Oligopoly

Figure 11-17 -Refer to Figure 11-17.What is the allocatively efficient output for the firm represented in the diagram?

In the long-run equilibrium,a monopolistically competitive firm earning normal profit produces the allocatively efficient output level.

For a monopolistically competitive firm,marginal revenue

Figure 11-6 -Refer to Figure 11-6.Suppose the above graph represents the relationship between the average total cost of producing notebook computers and the quantity of notebook computers produced by Dell.On a graph,illustrate the demand,MR,MC,and ATC curves which would represent Dell maximizing profits at a quantity of 100,000 per month and identify the area on the graph which represents the profit.

In game theory,the three key characteristics of a game are

We can draw demand curves for firms in perfectly competitive and monopolistically competitive industries,but not for oligopoly firms.The reason for this is

Table 11-7 Wal-Mart's (W) Choices Target's (T) Choices High Price Low price High Price W: \ 10,000 profit T: \ 10,000 profit W: \ 5,000 profit T: \ 14,000 profit Low price W: \ 14,000 profit T: \ 5,000 profit W: \ 7,000 profit T: \ 7,000 profit Table 11-7 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3.At the start of the game each firm charges a low price and each earns a profit of $7,000. -Refer to Table 11-7.For each firm,is there a better outcome than the current situation in which each firm charges the low price and earns a profit of $7,000?

Which of the following describes a difference between the marginal revenue and demand curves of a perfectly competitive firm and a monopolistically competitive firm?

Figure 11-17 -Refer to Figure 11-17.Suppose the firm is currently producing Qf units.What happens if it increases its output to Qg units?

What is the difference between zero accounting profit and zero economic profit?

Table 11-9 Alistair's (A) Choices Baine's (B) Choices Increase advertising budget Leave advertising budget as is Increase advertising budget A: \ 30,000 profit B: \ 30,000 profit A: \ 10,000 profit B: \ 50,000 profit Leave advertising budget as is A: \ 50,000 profit B: \ 10,000 profit A: \ 40,000 profit B: \ 40,000 profit Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising spending to compete for customers.If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 11-9 shows the payoff matrix for this advertising game. -Refer to Table 11-9.If Alistair assumes that Baine would increase its advertising budget,what should it do?

Table 11-13 Power Fuel's (P) Strategy Brawny Juice's (B) Strategy High Price Low Price High Price P: \ 12 P: \ 16 B: \ 12 B: \ 4m Low Price P: \ 4 P: \ 8 B: \ 16 B: \ 8 Two rival oligopolists in the athletic supplements industry, the Power Fuel Company and the Brawny Juice Company, have to decide on their pricing strategy.Each can choose either a high price or a low price.Table 11-13 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts. -Refer to Table 11-13.If Brawny Juice selects a high price,what is Power Fuel's best strategy and what will Power Fuel earn as a result of this strategy?

How does the long run equilibrium of a monopolistically competitive industry differ from that of a perfectly competitive industry?

Collusion would be common in an oligopoly and a monopolistically competitive industry.

Suppose that if a local McDonald's restaurant reduces the price of a Big Mac from $4.00 to $3.25,the number of Big Macs it sells per day will increase from 4 to 5.Explain the output effect and the price effect resulting from this change.Using a graph,illustrate both the loss in revenue from selling each of the first 4 Big Macs for $0.75 less and the additional revenue from selling 1 more Big Mac.What is the total change in revenue received which results from this price decrease?

All of the following are characteristics of game theory except

Which of the following is not an example of a monopolistically competitive market?

Two firms would sometimes be better off if they got together and agreed to charge a high price,rather than to compete and risk having to charge a lower,competitive price.What is the greatest deterrent to this strategy?

Figure 11-16 -Refer to Figure 11-16.Figure 11-16 depicts a monopolistically competitive barber shop.Use the diagram to answer the following questions. a.Suppose the average variable cost of production is $15 when output equals 110 haircuts and $15.25 when output equals 140 haircuts.If the firm wants to maximize its profit or minimize its losses,how many haircuts will it produce and what price should it charge? Explain your answer. b.Calculate the firm's profit or loss. c.What is likely to happen in this industry over time as it moves to its new long-run equilibrium? d.Suppose the barber shop depicted in the diagram remains in the industry.Is this barber shop likely to produce this same quantity of haircuts as in part (a)in the long run?

When a monopolistically competitive firm lowers it price one bad thing happens to the firm.What is this "one bad thing" called?