[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

6. Describe market equilibrium under monopolistic competition.
Why does the price charged by the typical firm
exceed the minimum average cost, even though other
firms may enter the market?
7. What are the gains from collusion? Why is there an
incentive for each member of a cartel to cheat by producing
more than the agreed-on amount? What is
the “prisoner’s dilemma” and how is it related to the
problem of cheating? What are the other problems
facing cartels?
8. Name some ways that firms might facilitate collusion,
if explicit collusion is ruled out by law.
9. What are barriers to entry? How can firms try to
deter entry?
10. Name and define three restrictive practices.
PROBLEMS
1. Explain how it is possible that at a high enough level
of output, if a monopoly produced and sold more, its
revenue would actually decline.
2. Assume there is a single firm producing cigarettes, and
the marginal cost of producing cigarettes is a constant.
Suppose the government imposes a 10-cent tax on each
pack of cigarettes. If the demand curve for cigarettes is
linear (that is, Q = a − bp, where Q = output, p = price,
and a and b are constants), will the price rise by more
or by less than the tax?
3. With what strategies might a furniture firm differentiate
its products?
4. Suppose a gas station at a busy intersection is surrounded
by many competitors, all of which sell identical
gas. Draw the demand curve the gas station faces, and
draw its marginal and average cost curves. Explain the
rule for maximizing profit in this situation. Now imagine
that the gas station offers a new gasoline additive called
zoomine, and begins an advertising campaign that
says: “Get zoomine in your gasoline.” No other station
offers zoomine. Draw the station’s demand curve after
this advertising campaign. Explain the rule for maximizing
profit in this situation, and illustrate it with an
appropriate diagram.
5. Explain how consumers may benefit from predatory
pricing in the short run, but not in the long run.
6. Assume the demand curve faced by a monopolist is
given by the following table:
Total Marginal
Price Demand revenue revenue
55 45
60 40
65 35
70 30
75 25
80 20
85 15
90 10
95 5
100 0
(a) Fill in the columns of the table for total revenue and
marginal revenue.
(b) Draw the demand curve and the marginal revenue
curve.
(c) If the firm’s marginal cost is $75, what is the
equilibrium monopoly price? How much does a
monopolist produce?
(d) What would be the price and quantity produced if
this were a competitive market (assume marginal
costs to be $75)?
7. How might cooperative agreements between firms—to
share research information, share the costs of cleaning
up pollution, or address shortfalls of supplies—end up
helping firms to collude in reducing quantity and
raising price?
8. Explain why each of the following might serve to deter
entry of a competitor.
(a) Maintaining excess production capacity
(b) Promising customers that you will undercut
any rival
(c) Selling your output at a price below that at which
marginal revenue equals marginal cost (Hint:
Assume entrants are unsure about what your marginal
costs are. Why would they be deterred from
entering if they believed you have low marginal
costs? Why might a lower price lead them to think
that you had low marginal costs?)
(d) Offering a discount to customers who sign up for
long-term contracts
286 ∂ CHAPTER 12 MONOPOLY, MONOPOLISTIC COMPETITION, AND OLIGOPOLY