1) Discuss how the monopoly and monopolistic competition market structures differ from perfect
competition. Where do you expect the price to be the highest? Give some examples of such industries.
2) Monopolistically competitive firms could increase the quantity they produce and lower the average total
cost of production. Why don't they do so?
3) Indicate whether the following statement is TRUE or FALSE and explain your answer: While firms in perfect
competition make zero economic profit in the long run, in monopolistic competition firms earn positive
economic profit in the long run.
4) MULTIPLE CHOICE (identify the one best answer below and explain your reasoning for each option):
Suppose a monopoly is producing at its profitâ€maximising (lossâ€minimizing) quantity, and the price
corresponding to this quantity is between average total cost and average variable cost. The monopoly will
a. keep producing in the short run but exit the market in the long run
b. shut down in the short run but return to production in the long run
c. shut down in the short run and exit the market in the long run
d. keep producing both in the short run and in the long run
e. There is not enough information to answer the question
a. Calculate the total revenue for Frank at each price.
b. Calculate the (approximate) marginal revenue for Frank at each price.
c. What is Frank's profitâ€maximising output level and price? Compare this with the perfectly
competitive equilibrium level of output and price.
d. (REALâ€WORLD APPLICATION) Go to this useful graphics: www.scores.org/graphics/monopoly, and
offer YOUR OWN views on the following questions: Is Google a monopoly? Should governments
regulate Google? If so, how? (you can use some other online resources to form your views)
6) (KEY QUESTION, continuing from last week) A small town is served by many perfectly competing
supermarkets, which have constant marginal cost.
a. Using a diagram of the market for groceries, show the (longâ€run) equilibrium price and quantity.
What is the deadweight loss in this case? Show the consumer and producer surplus in the figure.
b. Now suppose that the supermarkets combine to form one chain. Using a new diagram, show the
equilibrium price and quantity. What is the deadweight loss in this case? Indicate the consumer and
producer surplus, how have they changed? (Hint: All the supermarkets are one monopoly now)
c. Assume that the newly formed supermarkets chain can perfectly price discriminate (hint: it means
they can charge each consumer the maximum price they he/she is willing to pay – think about our
experiment in the lecture deriving the demand curve for your favourite singer’s tickets). How much
will be sold and what will be the deadweight loss in this case? Discuss how policymakers approach
these sorts of situations, and why.
7) (REALâ€WORLD APPLICATION) You are NOT required to read the oligopoly chapter in the textbook,
but you already know quite a lot about it from our discussion of strategic interactions in weeks 2â€3.
This market structure is between monopoly and monopolistic competition, with only a handful of
firms having a high degree of market power. Let’s refresh your memory with the following example.
Assume that the Australian lowâ€cost airline industry consists of two firms and their situation can be
represented by the following payoff matrix.
a. Before solving the game, put yourself in the position of Jetstar and write down your action. Then
independent of that, put yourself in the position of Virgin Blue and write down your action.
b. State all the dominated strategies in the full game, by which strategy they are dominated, and
whether weakly or strictly.
c. Solve the game by dominance, what is the equilibrium outcome by dominance, if any?
d. What are the pure strategy Nash equilibria of this game?
e. Assume that the two firms are able to cooperate with each other. Could this result in a better
outcome? If yes, what is the outcome?
f. Are the firms able to cooperate with each other? Why or why not?
g. If the firms play this game repeatedly, what do you think may happen?
8) (CRITICAL THINKING & REFLECTION) You can choose ONE of the following two tasks:
a. Write one good question about any issues covered in this problem set. You will ask and discuss it in
your tutorial so try to think of the answer too.
b. Find on the internet some academic study or media article (newspaper or blog etc.) that relates to
any of the covered topics. In 3â€4 sentences explain how.