REVIEW QUESTIONS
- What is the relationship between product differentiation and monopolistic competition?
- 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?
- How does a monopolistic competitor choose its profit-maximizing quantity of output and price?
- How can a monopolistic competitor tell whether the price it is charging will cause the firm to earn profits or experience losses?
- 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?
- Is a monopolistically competitive firm productively efficient? Is it allocatively efficient? Why or why not?
- What stops oligopolists from acting together as a monopolist and earning the highest possible level of profits?
- Consider the curve in the figure below, 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.
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- Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel supply? How much profit will the cartel earn?
- Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will be the industry quantity and price? What will be the collective profits of all firms in the industry?
- Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.
- 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 9.4 shows. Assuming that both firms know the payoffs, what is the likely outcome in this case?
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Firm B colludes with Firm A |
Firm B cheats by selling more output |
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Firm A colludes with Firm B |
A gets $1,000, B gets $100 |
A gets $800, B gets $200 |
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Firm A cheats by selling more output |
A gets $1,050, B gets $50 |
A gets $500, B gets $20 |