Exam 9: Monopolistic Competition and Oligopoly

U.S. firms may form cartels for purposes of foreign trade.

Price rigidity can be an indication of collusive agreements in an industry.

Under monopolistic competition, each seller firm is not particularly concerned about the relationship between its individual actions and those of other firms in the industry.

Two market situations in which there is a clear reason for a price leader's identity are:

Alpha Beta Corporation ABC) operates in a non-collusive oligopolistic market where firms tend to base their strategies on good old fashioned fear. ABC believes that at its current price its demand curve will be: Q = 1150 - 50P if it raised prices, since it expects that other firms will not follow a price increase. However, for price cuts, it believes its demand curve is: Q' = 250 - 10P since other firms are expected to follow a reduction in price. a. With the above assumptions, what are ABC's current price and quantity sold? b. Suppose that ABC's total cost function is: STC = 50 + 5Q + .1Q² + .004Q³ Is ABC maximizing its profit at the quantity and price you found in part a? Explain why or why not. If not at what quantity and price is profit maximized. NOTE - Round fractional units of production UP to the next highest whole unit - Round price to dollars and cents) c. Now suppose that ABC has made an error in the estimate of the total cost function so that the actual total cost function is: STC = 50 + 5Q + .17Q² + .004Q³ Is ABC maximizing its profit at the quantity and price you found in part a? Explain why or why not. If not at what quantity and price is profit maximized. NOTE - Round fractional units of production UP to the next highest whole unit - Round price to dollars and cents) d. Now suppose that ABC has made an another error in the estimate of the total cost function so that the actual total cost function is: STC = 60 + 5Q + .25Q² + .004Q³ Is ABC maximizing its profit at the quantity and price you found in part a? Explain why or why not. If not at what quantity and price is profit maximized. NOTE - Round fractional units of production UP to the next highest whole unit - Round price to dollars and cents)

Product differentiation refers to a wide variety of activities, such as design changes and advertising, that rival firms employ to attract consumers to their products.

All of the following are characteristics of monopolistic competition EXCEPT:

Product differentiation is the term economists have settled on to describe a market structure with numerous firms that sell slightly differentiated products.

In a market characterized by price leadership,

You believe that you have a costless monopoly. Given your estimate of the one day demand for mushrooms: Q_m = 900 - 100P_m Where Q_m = servings of fried mushroom and gravy. If another booth opens next to yours also selling fried mushroom and gravy, but demand remains as above assume the product is undifferentiated), how much revenue will each of you generate under the Cournot assumption?

A large firm that is a price leader in an industry characterized also by many small competing firms estimates that the market demand for its product to be as follows: Q_m = 20,700 - 75P, where Q_m is units per month. It expects small firms in the industry to supply output according to the following function: Q_s = 700 + 25P. What is the demand function for the large firm?

A cartel exists when a number of firms get together and agree on a policy of managing operations in a way that will maximize the joint profits of the group.

A large firm that is a price leader in an industry characterized also by many small competing firms estimates that the market demand for its product to be as follows: Q_m = 40,700 - 100P where Q_m is units per month. It expects small firms in the industry to supply output according to the following function: Q_s = 700 + 25P The large firm's marginal cost function is MC_L = 100 + .016Q a. What quantity will the large firm sell? b. What price will the large firm set? c. What quantity will the small firms sell?

Two market situations in which there is a clear reason for a price leader's identity are the efficient firm case and the dominant firm case.

Barriers to entry are conditions that make it difficulty for new firms to enter an industry or market where existing firms have long run interests.

Under monopolistic competition, each seller firm is usually very concerned about the relationship between its individual actions and those of other firms in the industry.

A large firm that is a price leader in an industry characterized also by many small competing firms estimates that the market demand for its product to be as follows: Q_m = 40,700 - 100P, where Q_m is units per month. It expects small firms in the industry to supply output according to the following function: Q_s = 700 + 25P. The quantity that the large firm will sell is 7750.

Under monopolistic competition, each seller firm attempts to retain or increase its market share by engaging in fierce price competition with the other firms.

A large firm that is a price leader in an industry characterized also by many small competing firms estimates that the market demand for its product to be as follows: Q_m = 20,700 - 75P, where Q_m is units per month. It expects small firms in the industry to supply output according to the following function: Q_s = 700 + 25P. If the large firm's marginal cost is constant at $52, what quantity will it sell?

A large firm that is a price leader in an industry characterized also by many small competing firms estimates that the market demand for its product to be as follows: Q_m = 28,700 - 75P, where Q_m is units per month. It expects small firms in the industry to supply output according to the following function: Q_s = 1,700 + 25P. What quantity and price will the large firm set?