# Define monopolistic competition and oligopolies.

1) Define returns to scale. Do you think that most

businesses are increasing, constant, or decreasing

returns to scale.

2) Define monopolistic competition and oligopolies.

Provide two real world examples.

3) Define prisoner's dilemma. Provide a real world

example.

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#### Solution Preview

Returns to scale refers to a technical property of production: what happens to output if we increase the quantity of all input factors by some amount. If output increases by that same amount there are constant returns to scale (CRS). If output increases by less than that amount, there are decreasing returns to scale. If output increases by more than that amount, there are increasing returns to scale, sometimes referred to simply as returns to scale.

Economies and diseconomies of scale refer to an economic property of production: what happens to cost if we increase the quantity of all input factors by some amount. If costs increase proportionately, there are no economies of scale, if costs increase by a greater amount, there are diseconomies of scale, if costs increase by a lesser amount, there are (positive) economies of scale. When combined, economies of scale and diseconomies of scale lead to ideal firm size theory, which states that per-unit costs decrease until they reach ...