Microeconomics Homework Ten
Briefly explain all your answers.
All of the following questions relate to Chapter Ten, although it is important
to understand the previous chapters (eight and nine, in particular) to frame
your answers.
1. The short-run profit maximization problem for a monopolistically
competitive firm is virtually the same as the problem faced by a
monopolist. However, there are key differences between the long-run
equilibria in the two market structures. Note: these three questions
relate to the long-run equilibrium.
a. (4 points) Are monopolistically competitive firms allocatively
efficient (is P = MC)? Briefly explain your answer.
b. (4 points) Are monopolistically competitive firms productively
efficient (do they produce at the minimum of LRATC)? Briefly
explain your answer.
c. (4 points) Do monopolistically competitive firms earn an
economic profit? Why or why not?
2. (6 points) Monopolistically competitive firms are inefficient (I guess I
am giving away an answer to the previous question, but you still need
to explain it), so why do we allow so many to exist? Monopolistically
competitive firms are numerous and prominent. So, what do we gain
from them that compensates us for their inefficiency? Briefly explain
your answer.
3. Oligopolies may produce the same good or a differentiated product.
The key distinction between oligopoly and other market structures is
that there is a strategic interdependence between the firms in the
market. Usually there are only a few firms in an oligopoly, but
sometimes there are many, with a few very large ones that can exert
some control over the market price.
a. (6 points) The firms in an oligopoly would find it advantageous to
form a cartel. What is a cartel? What price would the cartel
charge? That is, would they charge and price closer to what a
monopolist would charge, or closer to the price that would
prevail in a competitive market? Why? Briefly explain your
answer. b. (8 points) Cartels are difficult to form and maintain. Why is this?
Even if they are legal (they are not in the U.S.), what would make
it difficult for the firms to cooperate? Under what circumstances
is the cartel more likely to be successful? Briefly explain your
answer and give at least two difficulties.
c. (4 points) Briefly describe at least one strategy a firm could use
to encourage cooperation among the other firm(s) in their cartel.
Hint: you may find the section on repeated games on pages 155
– 156 particularly helpful in answering this question.
d. (4 points) Can oligopolies be efficient? Why or why not?