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Oligopoly, monopolistic competition in short run & long run

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Question:
1. The graph the follows (see attached file) shows an individual firm in long-run equilibrium. In which market structure is this firm operating? Explain. Compare the long run quantity and price to those of a perfectly competitive firm. What accounts for the difference? Is the equilibrium price greater than, equal to, or less than marginal cost? Why or why not?

2. What is the cost to a firm in an oligopoly that fails to take rivals' actions into account? Suppose the firm operates along demand curve D1 (see attached file) as if no firms will follow its lead in price cuts or price rises. In fact, however, other firms do follow the price cuts, and the true demand curve below P1 lies below D1. If the firm sets a price lower than P1, what will happen?

3. Suppose a firm in monopolistic competition has the following demand schedule. Suppose the marginal cost is a constant $70. How much will the firm produce? Is this a long- or short-run situation? If the firm is earning above-normal profit, what will happen to this demand schedule?

Price Quantity Price Quantity
$100 1 $470 5
95 2 55 6
88 3 40 7
80 4 22 8

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Answer:
1. This is the long-run equilibrium of a firm under monopolistic competition
The characteristics of a monopolistically competitive market are almost the same as in perfect competition, with the exception of monopolistic competition having heterogeneous products, and that monopolistic competition involves a great deal of non-price competition (based on subtle product differentiation). A firm making profits in the short run will break even in the long run because demand will decrease and average total ...

Solution Summary

Identification of the type of market structure, compare the long run quantity and price to those of a perfectly competitive firm.

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1. Based on your reading, which market structure is more applicable for the market for building commercial aircrafts, when there are two major manufacturers of the commercial airplanes and little possibility of entry by new firms:
a. perfect competition
b. monopoly
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2. Based on your reading, which market structure is most applicable for the market for soybeans? This product is homogeneous and produced by many different farmers. There is free entry, and the product is traded in a commodities market.
a. perfect competition
b. monopoly
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3. Based on your reading, which market structure is most applicable for the market for commercial diamonds in the 1970s? Mining, polishing, and distributing diamonds is controlled by a single company, and that company sets the quantity and price for majority of diamonds available in the market.
a. perfect competition
b. monopoly
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4. Based on your reading, which market structure is most applicable for the domestic market for heating oil when there are many resellers of heating oil and it is a homogeneous product?
a. perfect competition
b. monopoly
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5. Suppose an identical goods is sold in the three markets that are isolated from each other. In Market A, there are many sellers of the goods. In Market B, there are two sellers; these sellers are not allowed to communicate about there price and quantity until they actually offer the good for sale. In Market C, there is only one seller. All of the sellers have identical cost schedules. From highest to lowest, order the markets in term of the quantity of good that they sell in the market.
a. Market B, Market A, Market C
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c. Market C, Market B, Market A
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6. Based on your reading, which market structure is most applicable for the international market for crude oil? There are several producers of oil, which is a fairy homogeneous product. However, there is no possibility of entry and several producers have formed a cartel, the Organization of Petroleum Exporting Counties (OPEC).
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7. Based on your reading, which market structure is most applicable for the market for over-the-counter painkillers? There are many firms in this industry, and the products are differentiated.
a. perfect competition
b. monopoly
c. oligopoly
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8. Which of the following reflect the way a monopoly firm chooses a price and outputs?
a. price equal marginal cost
b. marginal revenue equal marginal cost
c. the greatest difference between marginal revenue and marginal cost
d. minimize average cost

9. Which of the following options best describes market structures from the lowest to the highest degree of market power?
a. perfect competition, monopolistic competition, oligopoly, monopoly
b. oligopoly, monopoly, monopolistic competition, perfect competition
c. monopoly, perfect competition, oligopoly, monopolistic competition
d. monopolistic competition, oligopoly, monopoly, perfect competition

10. Consider a perfectly competitive firm in the short run that is making a profit while producing 150 units of outputs at a marginal cost of $10 and a total revenue of $3,000. Which of the following best description the firm's actions or options?
a.. the firm is maximized profits
b. the firm could increase profits by decrease outputs
c. the firm could increase profit by in creasing outputs
d. the firm should shut down production

11. Based on your reading, which market structure is most applicable for the market generic aspirin which is a homogeneous product, made by many different firms.
a. perfect competition
b. monopoly
c. oligopoly
d. monopolistic competition

12. The demand curve of the a perfectly competitive firm could be more or less elastic than the demand curve of a firm with monopoly power depending on the level of output produced.
a. True
b. False

13. This of the following is most likely to occure. If the price in a perfectly competitive market is above a firm's average variable cost, but the below its average cost?
a. the firm will continue operating in the short run, but it will exit the industry in the long run
b. the firm should shut down immediately and exit the industry
c. the firm should continue operating in the short run and the long run.
d. The firm should shut down now and reopen when condition change.

14. A cable company has determined that the marginal revenue from an additional subscriber is $15 and the marginal cost of providing cable service is $5. Based on this information, what should the company do?
a. Increase the quantity of cable services provided
b. Decrease the quantity of the cable services provided
c. Keep the quantity of cable services provided constant

15. Suppose a perfectly competitive firm experiences an increase in wage paid to labor in the short run. In the short run, if the firm follows the profit-maximizing rule, which of the following may you conclude?
a. that variable, total, and marginal cost rise; output falls and profits fall
b. that variable and total cost rise, output is unchanged and profit falls
c. that variable and total cost rise, output and profits are unchanged
d. that variable, total, and marginal cost rise, output falls, and profits are unchanged.

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