Unit IV: Imperfect Competition

Problem Set #4

1a. Barriers to Entry-Skip (Gax will grade)

1b. MR=MC Rule• 1 Point- Profit-maximizing point, true for all

market structures• 1 Point- Explanation of why MR=MC is the rule

(any point beyond the firm is losing money)• 1 Point- Clear example of MR=MC Rule using

numbers

1c. Price Discrimination• 1 Point- Definition (charging customers different

prices for the same product)• 1 Point- Qualifications (monopoly power, no

resell, segregate the market)• 1 Point- Clear example

1d. Socially Optimal Price• 1 Point- P=MC• 1 Point-Allocatively Efficient• 1 Point- Clear example using numbers/graph.

1e. Fair Return Price• 1 Point- P=ATC • 1 point- Zero economic profit/normal

profit/TR=TC• 1 Point- Clear example of FRP using numbers or

a graph.

Problem Set Question #2

• Practice FRQ’s• Already graded• Record point total on template

Problem Set Question #3:

Worksheets

Regulating a Monopoly1 point-each question (All must be correct)1. Unregulated

A. 1500B. $4C. $6000D. $4500E. $1500 Profit

2. Socially Optimal (Approx. Ok)A. 3,000B. $1.50C. $4,500D. $7500E. $3000 LossF. YesG. $3000 (amount of the loss)

Regulating a Monopoly1 point-each question (All must be correct)3. Fair Return

A. 2500B. $2.50C. $6250D. $6250E. Zero Economic Profit

4. If not answered, (-1)5. If not answered, (-1)

A Quick Review of PC and Monopoly

1. A 5. C 9. C

2. C 6. D 10. C

3. D 7. A 11. C

4. B 8. C

½ Point for EACH

Price Discrimination1 point for TR column/ 1 point for MR column

-4

Price Discrimination (Continued)

3 Points•The rest of the worksheets are complete•All or nothing

Prisoner’s Dilemma5 Points possible (Deduct 1 point for each incorrect answer)

1a) Prisoner 1 and Prisoner 21b) Confess or not confess1c) If one confesses, he or she goes free, and the other gets 20 years in jail. If both confess, both get three years in jail. If neither confesses, both get one year in jail. 2)

Confess Not Confess

Confess -3, -3 0, -20

Not Confess -20,0 -1, -1

Prisoner 1

Prisoner 2

3) Dominant Strategies: Prisoner 1: Confess. Prisoner 2: Confess4) Dominated Strategies: Prisoner 1: Not Confess. Prisoner 2: Not Confess5) Nash Equilibrium: Both Confess.6a) You and the other student6b) Take the exam or not take the exam6c) If both players take the exam, you receive an A and the other student receives an F. If both players do not take the exam, both receive a B. If you take the exam and the other student does not take the exam, you receive an A and the other student receives an F. If the other student takes the exam and you do not take the exam, you receive an F and the other student receives an A.

7) Other Student

YouTake the Exam Not Take the Exam

Take the Exam A, F A, FNot take the Exam F, A B, B

8) Your Dominant Strategy: Take the Exam

9-13) Take a point off for each question left unanswered.

Question 4Worth 3 points. Take 1 point off for each wrong box.

Price Quantity Demanded Total Revenue Marginal Revenue

$10.00 0 - -9 1 9 98 2 16 77 3 21 56 4 24 35 5 25 14 6 24 -13 7 21 -32 8 16 -51 9 9 -7

4. Demand, MR, and TR for Monopolies a. Why the MR curve less than the demand

curve for all imperfectly competitive firms.

• 3 Points- To sell more the firm must lower price. It lowers price for ALL units. (It can’t charge people different prices)

• 2 Point- SPECIFIC numerical example that proves that the MR is less than the price.

b. Plotting MR and TR Curves• 1 Point- correctly plotted demand and marginal

revenue curves with D above MR• 1 Point- correctly plotted TR with TR rising then

falling• 1 Point- Identifies that elastic range is to the left

where MR is positive and inelastic is on the right.

• 1 Point- Total Revenue test says that when price falls and TR increases, demand is elastic

• 1 Point- Total Revenue test says that when price falls and TR decreases, demand is inelastic

Labeled elastic and inelastic ranges.

Q

Dol

lars

Dol

lars

TR

MR D

InelasticElastic

Q

5. Compare AND contrast monopolistic competition and perfect competition

• 2 Point (similarities)- perfect comp and mono comp have the following in common: – Many Firms– Easy Entry/Exit– Zero economic profit in LR

• 3 Points (differences)-perfect comp and mono comp have the following differences:– MC: controls price; PC: price takers– MC: D>MR; PC: D=MR– MC: advertising used; PC: no advertising– MC: Not All./Prod. Eff. In LR; PC: Both

Explain Oligopolies• 2 Point- Identify the characteristics of an

Oligopoly (few firms, large control over price, identical/differentiated products, high barriers to entry)

• 2 point- Explanation of game theory, ability to collude and incentive to cheat

• 1 Point- They explain that the kinked demand curve shows that non-colluding oligopolies match price cuts and ignore price increases.

Problem Set #6a

• (2 Points) No dominant strategy • (3 Points) If Awesomeski prices high,

Gaxski will price low. If Awesomeski prices low, Gaxski will price high.

Problem Set #6b

• (2 Points) Pricing high.• (3 Points) It doesn’t matter if Gaxski prices

high or low, Awesomeski will make more profit if it prices high, rather than low.

Problem Set #6c

• (2 Points) Awesomeski will make 300, Gaxski will make 250.

• (3 Points) Gaxski knows Awesomeski will price high because it is their dominant strategy. When Awesomeski prices high, Gaxski makes more money pricing low than they do high.

7) Take one point off for each stamp they don’t have.

8) Take points off for incorrect format.

• At the top left of the template, all questions should have point totals, except for #1.