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Oligopoly, monopolistic competition in short run & long run

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


Solution Preview

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.