Perfect competition
What is the only decision that a perfectly competitive firm has to make?
What quantity to produce
What demand curve is perceived by the monopolist?
the entire market demand (monopoly=market)
What characterizes monopolistic competition ?
Many sellers selling similar but differentiated products
What are the five necessary components of a game?
Players, actions, strategies, outcomes, payoffs
A perfectly competitive firm perceives a demand curve that is __________ ?
perfectly elastic
When a monopolist identifies its profit-maximizing quantity of output, how does it decide what price to charge?
How can a monopolistic competitor tell whether the price it is charging will cause the firm to earn profits or experience losses?
Compare the price they are charging to their average total cost at that quantity
The cartel game (cooperate, cheat) is an application of which classic 2x2 game?
cooperate cheat
cooperate $1K, $1K $200,$1.5K
cheat $1.5K,$200 $400,$400
Prisoners' dilemma
What are the three conditions that allow for a perfectly competitive market to form?
Identical product, many firms, no barriers to entry
The shut-down point is the intersection of what two curves?
MC and AVC
How is the perceived demand curve for a monopolistically competitive firm different from the perceived demand curve for a monopoly or a perfectly competitive firm?
it is something between perfectly elastic and market demand
What is the Nash equilibrium in the stag hunt game shown below?
stag hare
stag 10,10 1,8
hare 8,1 5,5
There are two NE, stag-stag and hare-hare
What happens in a perfectly competitive market if short term profits are >0?
Firms will enter and drive down profits
What is predatory pricing?
When a firm with market power aggressively cuts prices to block/discourage competition
Aside from advertising, how can monopolistically competitive firms increase demand for their products?
Suppose the prisoner's dilemma was a repeated game, that was played between the two prisoners 5 times. What will be the outcome of the five games?
silent, silent, silent, silent, confess
Your company operates in a perfectly competitive market. You have been told that advertising can help you increase your sales in the short run. Would you create an aggressive advertising campaign for your product? Explain
No - if you are operating in a perfectly competitive market you will be spending money advertising without any improvement in outcome (because you face a perfectly elastic demand curve). You also likely do not have money for an advertising campaign because you are earning 0 profits under perfect competition.
Imagine a monopolist could charge a different price to every customer based on how much the customer is willing to pay. How would this affect deadweight loss? (be precise)
Deadweight loss = 0
Make a case for why monopolistically competitive industries never reach long-run equilibrium.
Positive profits will encourage entry, this will drive down prices, with lower prices it will not be feasible for firms to invest in product differentiation, and there will be a tendency to exit the market... this will create a cycle
Find the Nash equilibrium of the following game:
X Y Z
A 6,6 8,20 0,8
B 10,0 5,5 2,8
C 8,0 20,0 4,4
CZ