HOW DO LONG-RUN PROFITS COMPARE FOR THE TWO TYPES OF FIRMS?

16 May HOW DO LONG-RUN PROFITS COMPARE FOR THE TWO TYPES OF FIRMS?

Illustrated below are the marginal cost and average total cost curves for a small firm that is in long-run equilibrium.

a. Locate the long run- equilibrium price and quantity if the firm is perfectly competitive.

b. Label the price and quantity p1 and q1.

c. Draw in a demand and marginal revenue curve to illustrate long-run equilibrium if the firm is monopolistically competitive. Label the price and quantity p2 and q2.

d. How do the monopolistically competitive firm’s price and output compare to those of the perfectly competitive firm?

e. How do long-run profits compare for the two types of firms?

10. Why is a firm in monopolistic competition said to be competitive? In What sense is that firm monopolistic?

11. Why might a price-leadership model of oligopoly not be an effective means of collusion in an oligopoly?

12. Why would each of the following induce some members if OPEC to cheat on their cartel agreement?

a. Newly joined cartel members are less- developed countries.

b. The number of cartel members doubles from 12 to 24.

c. International debts of some members grow.

d. Expectations grow that some members will cheat

13. Use revenue and cost curves to illustrate and explain the sense in which a cartel behaves like a monopolist.

14. Suppose there are only two automobile companies, Ford and Chevrolet. Ford believes that Chevrolet will match any price it sets, but Chevrolet too is interested in maximizing profits. Use the following price and profit data to answer the following questions.

a. What price will Ford charge/

b. What price will Chevrolet charge once Ford has set its price?

c. What is Ford profit after Chevrolet’s response?

d. If the two firms collaborated to maximize joint point, what prices would they set?

e. Given your answer to part (d) how could undetected cheating on price cause the cheating firms’ profit to rise?

15. While grading a final exam, an economics professor discovers that two students have virtually identical answers. She is convinced the two cheated but cannot prove it. The professor speaks with each student separately and offers the following deals; Sign a statement admitting to cheating. If both student sign the statement, each will receive an “F” for the course. If only one signs he is allowed to withdraw from the course while the other student is expelled. If neither signs, both receive a C because the professor does not have sufficient evidence to prove cheating.

a. Draw the payoff matrix

b. Which outcome do you expect? Why?

16. Why is firm behavior under oligopoly so difficult to predict?

17. The following table shows the hours per week supplied to a particular market by three individuals at various wage rates. Calculate the total hours per week (Q1) supplied to the market.

Why does the quantity supplied tend to increase with the hourly wage? Which individuals. If any, have backward-bending supply curves in the wage range shown? Does the market supply curve bend backward in the wage range shown in the table?