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A Nash equilibrium is
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reached when each player chooses the best strategy for himself, given the strategies chosen by the other players in the group.
question
Refer to the diagram to the right which shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
What is the area that represents the total fixed cost of production?
What is the area that represents the total fixed cost of production?
answer
P1bdP3
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A monopolistically competitive firm will
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have some control over its price because its product is differentiated.
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Is a monopolistically competitive firm allocatively efficient?
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No, because price is greater than marginal cost.
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Consumers benefit from monopolistic competition by
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being able to choose from products more closely suited to their tastes.
question
Refer to the diagram to the right which shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
Should the firm represented in the diagram continue to stay in business despite its losses?
Should the firm represented in the diagram continue to stay in business despite its losses?
answer
Yes, its total revenue covers its variable cost.
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A set of actions that a firm takes to achieve a goal, such as maximizing profits, is called
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a business strategy.
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A monopolistically competitive industry that earns economic profits in the short run will
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experience the entry of new rival firms into the industry in the long run.
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Nike has used Michael Jordan to create the impression that Air Jordan basketball shoes are superior to any other basketball shoe. Nike is attempting to
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differentiate Air Jordan basketball shoes from other types of basketball shoes.
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The figure shows the payoff matrix for Walmart and Target from every combination of pricing strategies for the popular PlayStation 4. At the start of the game each firm charges a low price and each earns a profit of $7,000.
For each firm, is there a better outcome than the current situation in which each firm charges the low price and earns a profit of $7,000?
For each firm, is there a better outcome than the current situation in which each firm charges the low price and earns a profit of $7,000?
answer
Yes, the firms can implicitly collude and agree to charge a higher price.
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A monopolistically competitive firm maximizes profit where
answer
price > marginal cost.
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A trademark is
answer
a distinguishing attribute such as a sign or logo that allows a firm to uniquely identify its product.
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What is the incentive for a firm to join a cartel?
answer
to be able earn larger profits than if it was not part of the cartel.
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Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. The table to the right shows the firm's demand and cost schedules.
What is Eco Energy's profit?
What is Eco Energy's profit?
answer
$145
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Hewlett-Packard will not raise the prices of its personal computers without first considering how Dell might respond. This is evidence of
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interdependence.
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A dominant strategy
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is one that is the best for a firm, no matter what strategies other firms use.
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In game theory, the three key characteristics of a game are
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rules, strategies, and payoffs.
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To maximize their profits and defend those profits from competitors, monopolistically competitive firms must
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differentiate their products.
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What is the dominant strategy in the prisoners' dilemma?
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Each prisoner confesses because this is the rational action to pursue.
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The study of how people make decisions in situations where attaining their goals depends on their interactions with others is called
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game theory.
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A four-firm concentration ratio measures
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the fraction of an industry's sales accounted for by the four largest firms.
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Which of the following is true for a firm with a downward-sloping demand curve for its product?
answer
Price equals average revenue but is greater than marginal revenue.
question
Refer to the diagram to the right which shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
What is the area that represents the total variable cost of production?
What is the area that represents the total variable cost of production?
answer
0P1bQa
question
Refer to the diagram to the right which shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
If the firm represented in the diagram is currently producing and selling Qa units, what is the price charged?
If the firm represented in the diagram is currently producing and selling Qa units, what is the price charged?
answer
$P2
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In the long run, if price is less than average cost,
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there is an incentive for firms to exit the market.
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If the demand curve for a firm is downward-sloping, its marginal revenue curve
answer
will lie below the demand curve.
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Both monopolistically competitive firms and perfectly competitive firms maximize profits
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by producing where marginal revenue equals marginal cost.
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Economies of scale can lead to an oligopolistic market structure because
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if larger firms have lower costs, new small entrants will not be able to produce at the low costs achieved by the big established firms.
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Why does a prisoner's dilemma lead to a noncooperative equilibrium?
answer
because each rational player has a dominant strategy to play a certain way regardless of what other players do
question
Refer to the diagram to the right which shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
What is the area that represents the total revenue made by the firm?
What is the area that represents the total revenue made by the firm?
answer
0P2cQa
question
You have just opened a new Italian restaurant in your hometown where there are three other Italian restaurants. Your restaurant is doing a brisk business and you attribute your success to your distinctive northern Italian cuisine using locally grown organic produce. What is likely to happen to your business in the long run?
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Your success will invite others to open competing restaurants and ultimately your profits will be driven to zero.
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In the short run, a profit maximizing firm's decision to produce should be guided by whether
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its total revenue covers its variable cost.
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What is the profit-maximizing rule for a monopolistically competitive firm?
answer
to produce a quantity such that marginal revenue equals marginal cost
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OPEC periodically meets to agree to restrict the cartel's oil output, and yet almost every member of OPEC produces more than its own output quota. This suggests that OPEC has a
answer
noncooperative equilibrium.
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A cartel is
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a group of firms that enter into a formal agreement to fix prices to maximize joint profits.
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In an oligopoly market
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one firm's pricing decision affects all the other firms.
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Economists agree that a monopolistically competitive market structure
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benefits consumers because firms to produce products that appeal to a wide range of consumers tastes.
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The DeBeers Company of South Africa was able to block competition through
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ownership of an essential input.
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In most business situations where firms compete, often they can escape the Prisoners' Dilemma and reach the most profitable outcome. Which of the following is a reason for this?
answer
Most games are repeated games and firms can employ retaliation strategies against those who do not cooperate.
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An oligopolist differs from a perfect competitor in that
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there are no entry barriers in perfect competition but there are entry barriers in oligopoly.
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Monopolistically competitive firms can differentiate their products
answer
through marketing.
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Oligopolies exist and do not attract new rivals because
answer
of barriers to entry.
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A member of a cartel like OPEC has an incentive to
answer
agree to a low cartel production level and then produce more than its quota.
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One reason why, in the last four decades, the number of new auto makers in the world has been very small compared to the past is that
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new producers cannot match the economies of scale of existing auto makers.
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Refer to the table to the right. What is the marginal revenue of the 3rd unit?
answer
$5.50
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A monopolistically competitive firm faces a downward-sloping demand curve because
answer
of product differentiation.
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What is a prisoners' dilemma?
answer
a game in which players act in rational, self-interested ways that leave everyone worse off
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The prisoners' dilemma illustrates
answer
why firms will not cooperate if they behave strategically.
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A monopolistically competitive market is described as one in which there are
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a large number of firms selling similar, but not identical, products.
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We can draw demand curves for firms in perfectly competitive and monopolistically competitive industries, but not for oligopoly firms. The reason for this is
answer
we can assume that the prices charged by perfectly competitive and monopolistically competitive firms have no impact on rival firms. For oligopoly this assumption is unrealistic.
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