13. Monopolistic Competition and Oligopoly. CHAPTER. C H A P T E R C H E C K L I S T. When you have completed your study of this chapter, you will be able to. 1 Explain how price and quantity are determined in monopolistic competition.
Monopolistic Competition and Oligopoly
3 Explain the dilemma faced by firms in oligopoly.
4 Use game theory to explain how price and quantity are determined in oligopoly.
1. Profit is maximized when MR = MC.
2.The profit-maximizing output is 125 pairs of Tommy jeans per day.
3.The profit-maximizing price is $75 per pair.
ATC is $25 per pair, so
4. The firm makes an economic profit of $6,250 a day.
1. The output that maximizes profit is 75 pairs of Tommy jeans a day.
2. The price is $50 per pair. Average total cost is also $50 per pair.
3. Economic profit is zero.
1. The efficient scale is 100 pairs of Tommy jeans a day.
2. The firm produces less than the efficient scale and has excess capacity.
3. Price exceeds 4.marginal cost.
5. Deadweight loss arise.
1.When advertising costs are added to
2. The average total cost of production,
3. Average total cost increases by a greater amount at small outputs than at large outputs.
4.If advertising enables sales to increase from 25 pairs of jeans a day to 100 pairs a day,
and the average total cost falls from $60 a pair to $40 a pair.
The bottom line on the question of efficiency of monopolistic competition is ambiguous.
In some cases, the gains from extra product variety offsets the selling costs and the extra cost arising from excess capacity.
It is less easy to see the gains from being able to buy brand-name drugs that have a chemical composition identical to that of a generic alternative.
But many people do willingly pay more for the brand-name alternative.
Oligopoly is a market with a small number of firms, and each firm is large and can influence the market price.
Game theory provides an answer.
Table 13.5 shows the prisoners’ dilemma payoff matrix for Art and Bob.