ECO100Y1 Lecture Notes - Lecture 11: Normal-Form Game, Monopolistic Competition, Demand Curve

22 views2 pages

bluegrasshopper710

31 Jan 2018

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Monopolistic competition: firms maximize profits where mr = mc, short-run. Firm may: earn zero economic profit ( p = atc, earn economic profit (p > atc, suffer economic loss ( p < atc, long run. Firms earn zero economic profit ( p = atc), due to freedom of entry/exit. If firms are earning economic profits, entry of new firms shifts demand curves to left. Example: p > atc e(cid:272)o(cid:374)o(cid:373)i(cid:272) profit, no (cid:271)arriers to e(cid:374)try (cid:374)e(cid:449) fir(cid:373)s e(cid:374)ter i(cid:374)dustry, ne(cid:449) fir(cid:373)s e(cid:374)ter i(cid:374)dustry dd shifts left. Pri(cid:272)e (cid:894)due to left(cid:449)ard shift of de(cid:373)a(cid:374)d a(cid:374)d left(cid:449)ard shift of margi(cid:374)al re(cid:448)e(cid:374)ue(cid:895) Suppose: there are 20 pizza shops, each has 1/20th of the market. Result: 10 new pizza shops open (no barriers to entry: each has 1/30th of the market. Each of initial shops hs 1/30th of market. Demand curve of initial shops have shifted leftward. Oligopoly: cigarette producers (few, aware of mutual interdependence) Dominant strategy: advertise on tv, earn million each.

Related Questions

1. In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?

a. P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20.

b. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0.

c. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0.

d. P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0.

2. Describe the supply curve of a constant cost industry.

a. Upward sloping

b. Flat

c. Downward sloping, then upward sloping

d. Downward sloping

3. At the profit-maximizing output level P = MC, if P > AC then firms can earn an above-normal profit, causing entry into the industry. True or false?

4. In a competitive market, the amount of a good that is produced is such that social surplus is:

a. Minimized

b. Maximized

c. Zero

d. Hidden