ECON101 Chapter Notes - Chapter 15: Nash Equilibrium, Normal-Form Game, Monopolistic Competition

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cyanbat359

17 Feb 2016

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Robert Park

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ECON101 Full Course Notes

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Natural or legal barriers prevent the entry of new firms. Price setters (some sort of market power) Note: number of firms that eliminate the economic profit of a monopoly (through rent seeking and entering market) determine if it is a monopolistic competition or oligopoly. Lies between perfect competition and monopoly: barriers to entry (natural or legal barriers to entry can create oligopoly) Economies of scale and natural barriers to entry can create natural oligopoly, similar to natural monopoly. Natural oligopoly: economies and scale and demand form a natural barrier to entry. A single firm can provide a product at lowest possible average cost (natural barrier) 2 firms can supply product at lowest possible price because they have lowest average cost of production. Ex. some cities only have 2 taxi companies, 2 car rental firms. Legal oligopoly: arises when legal barrier to entry protects small number of firms in the market: small number of firms.

Related Questions

The following table shows the demand curve and cost information for a firm that is monopoly

Price	Quantity	TC
$10	0	$500
$9	200	$1,000
$8	400	$1,600
$7	600	$2,500
$6	800	$4,000

What quantity should they produce to maximize their profits?

200 units

400 units

800 units

600 units

Mary competes in a monopolistically competitive market. Suddenly, 5 new firms enter the market causing her perceived demand curve to shift. The following tables show her original and new demand curves and her cost information.

Assume that Mary can only choose from the quantities of output given in the table. By how will the quantity that she produces change after the new firms enter the market?

Original Demand Curve

Price	quantity	TC
30	0	$130
25	10	$140
20	20	$260
15	30	$450
10	40	$660

New Demand Curve

25	0	$130
20	10	$140
15	20	$260
10	30	$450
5	40	$660

Decrease by 5

Decrease by 10

Increase by 10

Increase by 5

Monopolistic competitor has the following information about cost and demand

Quantity	Price($)	Total Revenue ($)	Marginal Revenue ($)	Total Cost ($)	Marginal Cost ($)	Average Cost ($)
0	25	0	25	30	----	----
2	24	48	23	35	2.5	17.5
4	23	92	21	45	5	11.25
6	22	132	19	60	7.5	10
8	21	168	17	77	8.5	9.63
10	20	200	15	100	11.5	10
12	19	228	13	126	13	10.5
14	18	252	11	165	19.5	11.79
16	17	272	9	210	22.5	13.13
18	16	288	7	260	25	14.44
20	15	300	5	320	30	16

If this industry was perfectly competitive, what price would the good sell for?

$19

$23

$21

$15

Monopolistic competitor has the following information about cost and demand

Quantity	Price($)	Total Revenue ($)	Marginal Revenue ($)	Total Cost ($)	Marginal Cost ($)	Average Cost ($)
0	25	0	25	30	----	----
2	24	48	23	35	2.5	17.5
4	23	92	21	45	5	11.25
6	22	132	19	60	7.5	10
8	21	168	17	77	8.5	9.63
10	20	200	15	100	11.5	10
12	19	228	13	126	13	10.5
14	18	252	11	165	19.5	11.79
16	17	272	9	210	22.5	13.13
18	16	288	7	260	25	14.44
20	15	300	5	320	30	16

What will the firm

ceriseminnow141

1. All of the following are characteristics of long-run equilibrium for firms in a monopolistically competitive market except:

A. price equals marginal cost.

B. price equals average total cost.

C. price exceeds the minimum of the average total cost.

D. marginal cost equals marginal revenue.

2. All of the following are strategies a firm with market power can adopt to increase its profits over time except:

A. erecting barriers to entry.

B. setting price equal to the marginal costs of production.

C. mergers with, and acquisitions of, competing firms.

D. influencing the regulatory process.

3. Assume that for a particular firm's output price = $80, marginal cost = $30, average total cost = $25. Based on this information, the firm's Lerner Index is equal to:

A. 0.313.

B. 0.625.

C. 0.6.

D. 0.375.

4. Assume that when the price is $20, the quantity demanded is 9 units, and when the price is $19, the quantity demanded is 10 units. Based on this information, what is the marginal revenue resulting from an increase in output from 9 units to 10 units?

A. $10

B. $1

C. $19

D. $20

5. Because firms produce a differentiated product, each of the firms in a monopolistically competitive market faces a demand curve that is:

A. perfectly elastic.

B. downward sloping.

C. perfectly inelastic.

D. perfectly elastic or perfectly inelastic depending on whether the firm's output is a luxury or a necessity.

6. Suppose a monopolist is producing a level of output such that MR > MC. What should the firm do to maximize its profits?

A. The firm should increase output.

B. The firm should increase the price.

C. The firm should do nothing - it wants to maximize the difference between MR and MC in order to maximize its profits.

D. The firm should hire less labor.

7. Suppose the firms in a monopolistically competitive market are earning positive economic profits. What will happen to move the market to its long-run equilibrium?

A. The demand curves faced by firms in the market will shift to the right.

B. The firms' demand curves will become less elastic.

C. More close substitutes will appear in the market.

D. Some firms will exit the market if they can't cover all of their fixed and variable costs.

8. The Lerner Index is a measure of market power that focuses on:

A. the difference between a firm's product price and its marginal costs of production.

B. the share of the market controlled by the X largest firms in the market.

C. the ratio of the price of a firm's product to the price elasticity of demand for the product.

D. the sum of the squares of the market share of each firm in an industry.

9. The measure of market power that focuses on the share of the market controlled by the X largest firms in the market is known as:

A. the Lerner Index.

B. the Herfindahl-Hirschman Index.

C. the Minimum-Efficient Scale Index.

D. a concentration ratio.

10. The monopoly characteristic of monopolistically competitive firms ensures that such firms will earn positive economic profits over the long-run.

a. True

b. False

ivoryguinea-pig63

market equilibrium. There is data on three different goods ï¿½ bananas, chocolate, and bonds. Consider the market for bananas at a local produce store. The manager has data on how much consumers will demand and how much his distributors will supply at various prices.??What is the market clearing price and quantity? How did you arrive at that result? The Market for Bananas

Price Supply Demand

50 100 35

45 90 40

40 80 45

35 70 40

30 60 55

25 50 50

20 40 55

15 30 60

10 20 75

5 10 80

Now consider the market for three kinds of chocolate at a candy store. The manager has data on how much consumers will demand and how much his distributors will supply for three different market segments: Premium, Generic, and Every Day.??What is the market clearing price and quantity for each segment? How did you arrive at that result? Premium Chocolate Price Supply Demand

2 300 5

1.75 100 10

1.5 80 20

1.25 70 50

1 30 100

0.75 0 200

0.5 0 20,000

0.25 0 40,000

Generic/Store Chocolate

Price Supply Demand

2 100 0

1.75 90 0

1.5 50 0

1.25 40 0

1 30 5

0.75 20 10

0.5 10 100

0.25 0 10,000

Every Day Chocolate

Price Supply Demand

2 200 0

1.75 70 0

1.5 30 0

1.25 20 0

1 10 0

0.75 0 100

0.5 0 1,000

0.25 0 20,000

A state government is issuing tax-free bonds to finance the building of a new bridge. The government will issue 10,000 bonds at an auction. The government will take the highest bid, the next highest, and so on until all the bonds are sold. Every winner pays the lowest price. ??What is the market clearing price and quantity? How did you arrive at that result?

Price Supply Demand

101 10,000 100

100.5 10,000 500

100 10,000 4,500

99.5 10,000 4,900

99 10,000 6,100

98.5 10,000 10,000

Thanks.

Maria

ECON101 Chapter Notes - Chapter 15: Nash Equilibrium, Normal-Form Game, Monopolistic Competition

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