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10.1: Monopolistic CompetitionSelf-Check QuestionsQ1Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies? Q2Continuing with the scenario outlined in question 1, in the long run, the positive economic profits earned by the monopolistic competitor will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm’s profit, what will happen to the original firm’s profit-maximizing price and output levels? Review QuestionsQ3What is the relationship between product differentiation and monopolistic competition? Q4How is the perceived demand curve for a monopolistically competitive firm different from the perceived demand curve for a monopoly or a perfectly competitive firm? Q5How does a monopolistic competitor choose its profit-maximizing quantity of output and price? Q6How can a monopolistic competitor tell whether the price it is charging will cause the firm to earn profits or experience losses? Q7If 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? Q8Is a monopolistically competitive firm productively efficient? Is it allocatively efficient? Why or why not? Critical Thinking QuestionsQ9Aside from advertising, how can monopolistically competitive firms increase demand for their products? Q10Make a case for why monopolistically competitive industries never reach long-run equilibrium. Q11Would you rather have efficiency or variety? That is, one opportunity cost of the variety of products we have is that each product costs more per unit than if there were only one kind of product of a given type, like shoes. Perhaps a better question is, “What is the right amount of variety? Can there be too many varieties of shoes, for example?” ProblemsQ12Andrea’s Day Spa began to offer a relaxing aromatherapy treatment. The firm asks you how much to charge to maximize profits. The demand curve for the treatments is given by the first two columns in Table below; its total costs are given in the third column. For each level of output, calculate total revenue, marginal revenue, average cost, and marginal cost. What is the profit-maximizing level of output for the treatments and how much will the firm earn in profits? PriceQuantityTC$25.000$130$24.0010$275$23.0020$435$22.5030$610$22.0040$800$21.6050$1,005$21.2060$1,225SolutionS1An increase in demand will manifest itself as a rightward shift in the demand curve, and a rightward shift in marginal revenue. The shift in marginal revenue will cause a movement up the marginal cost curve to the new intersection between \(MR\) and \(MC\) at a higher level of output. The new price can be read by drawing a line up from the new output level to the new demand curve, and then over to the vertical axis. The new price should be higher. The increase in quantity will cause a movement along the average cost curve to a possibly higher level of average cost. The price, though, will increase more, causing an increase in total profits. S2As long as the original firm is earning positive economic profits, other firms will respond in ways that take away the original firm’s profits. This will manifest itself as a decrease in demand for the original firm’s product, a decrease in the firm’s profit-maximizing price and a decrease in the firm’s profit-maximizing level of output, essentially unwinding the process described in the answer to question 1. In the long-run equilibrium, all firms in monopolistically competitive markets will earn zero economic profits. 10.2: OligopolySelf-Check QuestionsQ1Consider the curve shown 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.
Q2Sometimes 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 shown in the prisoner’s dilemma box in Table below. Firm B colludes with Firm AFirm B cheats by selling more outputFirm A colludes with Firm BA gets $1,000, B gets $100A gets $800, B gets $200Firm A cheats by selling more outputA gets $1,050, B gets $50A gets $500, B gets $20Assuming that the payoffs are known to both firms, what is the likely outcome in this case? Review QuestionsQ3Will the firms in an oligopoly act more like a monopoly or more like competitors? Briefly explain. Q4Does each individual in a prisoner’s dilemma benefit more from cooperation or from pursuing self-interest? Explain briefly. Q5What stops oligopolists from acting together as a monopolist and earning the highest possible level of profits? Critical Thinking QuestionsQ6Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different product? Explain your reasoning. Q7When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term—that the incentives for individual members to cheat would become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons. ProblemsQ8Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn \(\$100\). If they decide to work together and both lower their output, they can each earn \(\$150\). If one person lowers output and the other does not, the person who lowers output will earn \(\$0\) and the other person will capture the entire market and will earn \(\$200\). Table below represents the choices available to Mary and Raj. What is the best choice for Raj if he is sure that Mary will cooperate? If Mary thinks Raj will cheat, what should Mary do and why? What is the prisoner’s dilemma result? What is the preferred choice if they could ensure cooperation? A = Work independently; B = Cooperate and Lower Output. (Each results entry lists Raj’s earnings first, and Mary's earnings second.) MaryABRajA($100, $100)($200, $0)B($0, $200)($150, $150)Q9Jane and Bill are apprehended for a bank robbery. They are taken into separate rooms and questioned by the police about their involvement in the crime. The police tell them each that if they confess and turn the other person in, they will receive a lighter sentence. If they both confess, they will be each be sentenced to \(30\) years. If neither confesses, they will each receive a \(20\)-year sentence. If only one confesses, the confessor will receive \(15\) years and the one who stayed silent will receive \(35\) years. Table below represents the choices available to Jane and Bill. If Jane trusts Bill to stay silent, what should she do? If Jane thinks that Bill will confess, what should she do? Does Jane have a dominant strategy? Does Bill have a dominant strategy? A = Confess; B = Stay Silent. (Each results entry lists Jane’s sentence first (in years), and Bill's sentence second.) JaneABBillA(30, 30)(15, 35)B(35, 15)(20, 20)SolutionS1
S2Firm B reasons that if it cheats and Firm A does not notice, it will double its money. Since Firm A’s profits will decline substantially, however, it is likely that Firm A will notice and if so, Firm A will cheat also, with the result that Firm B will lose \(90\%\) of what it gained by cheating. Firm A will reason that Firm B is unlikely to risk cheating. If neither firm cheats, Firm A earns \(\$1000\). If Firm A cheats, assuming Firm B does not cheat, A can boost its profits only a little, since Firm B is so small. If both firms cheat, then Firm A loses at least \(50\%\) of what it could have earned. The possibility of a small gain (\(\$50\)) is probably not enough to induce Firm A to cheat, so in this case it is likely that both firms will collude. Contributor
This page titled 10.E: 10.E-Monopolistic Competition and Oligopoly (Exercises) is shared under a not declared license and was authored, remixed, and/or curated by Rose M. Spielman, William J. Jenkins, Marilyn D. Lovett, et al. (OpenStax) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request. Will the firms in oligopoly act more like monopoly or competitors?If oligopolists compete hard, they may end up acting very much like perfect competitors, driving down costs and leading to zero profits for all. If oligopolists collude with each other, they may effectively act like a monopoly and succeed in pushing up prices and earning consistently high levels of profit.
Is a oligopolistic firm acts more likely to a monopoly?A firm in oligopoly will behave more competition because they try to capture market share from each other, to increase their market dominance. But, if these firms collude, then they will have control over production and then they will behave like collective monopoly.
Does an oligopoly have many competitors?The primary idea behind an oligopolistic market (an oligopoly) is that a few companies rule over many in a particular market or industry, offering similar goods and services. Because of a limited number of players in an oligopolistic market, competition is limited, allowing every firm to operate successfully.
How oligopoly is different from monopoly?A monopoly is when a single company produces goods with no close substitute, while an oligopoly is when a small number of relatively large companies produce similar, but slightly different goods. In both cases, significant barriers to entry prevent other enterprises from competing.
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