EC-251 Intermediate Microeconomics
PROBLEM SET 3
- Fill out the chart below based on your knowledge of market structures.
| Type of Market | Perfect Competition | Monopolistic Competition | Oligopoly | Monopoly |
| Ability to influence price (i.e. none, all) | | | | |
| Is firm demand curve downward sloping? | | | | |
| Number of sellers (i.e. many, few) | | | | |
| Product differentiation (yes or no) | | | | |
| Barriers to entry (i.e. none, few) | | | | |
| Can a firm make a long-run profit? | | | | |
| Is this market structure efficient? | | | | |
| Examples | | | | |
| Adapted from: Riddell et al. 2010 |
- In your own words, explain the relationship between the markup a firm can charge on its product, the price elasticity of demand for that product, and the amount of market/monopoly power the firm possesses.
- If a firm were to increase their markup, how might this help the firm grow and expand? If a firm were to decrease their markup, how might this help the firm grow and expand?What market structure might be more suitable for a strategy of increasing the markup? What market structure might be more suitable for a strategy of decreasing the markup?
- Use the information below to find the profit maximizing level of output and price for BetterFiTbrand’s new line of t-shirts.
| BetterFiTbrand, Inc Demand Schedule, Revenues, and Costs | |
| Output | Price | Total Revenue | Marginal Revenue | Total Cost | Marginal Cost | Average Cost | Total Profit |
| Q | P | P X Q | MR = | TC | MC = | AC = | |
| 0 | – | | – | 5 | – | – | |
| 1 | 10 | | | 9 | | | |
| 2 | 8 | | | 10.1 | | | |
| 3 | 6 | | | 12 | | | |
| 4 | 4 | | | 16 | | | |
| 5 | 2 | | | 25 | | | |
| 6 | 0 | | | 39 | | | |
- When new firms enter a monopolistic competitive industry, what happens to the firm’s profits? What can they do to prevent this from happening?
- What are some ways to measure a firm’s degree of monopoly power? What is a way to measure the degree of monopoly power in an entire industry?
- What are some potential benefits of firms having monopoly power? What are some potential harmful consequences of firms having monopoly power? Do you think companies like Google, Amazon, Apple, and Facebook have grown too big and need to be regulated/broken up?
- How does playing the oligopoly game (prisoner’s dilemma) multiple times with the same player change what strategy you decide to play?
Solution:
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