Exam 13: Monopolistic Competition and Oligopoly

Monopolistic Competition. Asian Imports, Inc., markets electronic devices imported from Asian producers. The company recently introduced an innovative and enormously successful 5 GB Joystick (computer memory device), but a flood of competitor entry and downward pressure on both prices and profits is expected during the coming year.

Cartel Pricing. An illegal cartel has been formed by three leading residential sanitation (trash pick-up) service companies in Honolulu, Hawaii. Total production costs at various levels of service per month are as follows:

Cartel Pricing. An illegal cartel has been formed by the three leading catering services companies in Colorado Springs, Colorado. Each are large enough to handle parties and food service for groups of over 100 persons. Total production costs for various group sizes are as follows:

The industry supply curve is derived through the horizontal summation of firm:

Firm Supply. Wilson Fabricators, Inc., and Johnson City Metalworks, Ltd., are domestic suppliers of backyard basketball goals. Given the vigor of domestic competition, P = MR in this market. Marginal cost relations for each firm are: where Q is output in units, and MC > AVC for each firm.

Monopolistic competition is characterized by:

Competition Concepts. Indicate whether each of the following statements is true or false and why. A. A high ratio of distribution cost to total cost tends to increase competition by widening the geographic area over which any individual producer can compete. B. The price elasticity of demand will tend to fall as new competitors introduce substitute products. C. Equilibrium in monopolistically competitive markets requires that firms be operating at the minimum point on the long-run average cost curve. D. An increase in product differentiation will tend to decrease the slope of firm demand curves. E. A perfectly functioning cartel would achieve the perfectly competitive industry price-output combination.

In oligopoly markets, the market demand curve is: