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Increasing-Cost Industries, Antitrust Legislation, and Game Theory in Oligopoly

1. Suppose you own a home remodeling company. You are currently earning short-run profits. The home remodeling industry is an increasing-cost industry. In the long run, what do you expect will happen to
a. Your firm's costs of production? Explain.
b. The price you can charge for your remodeling services? Why?
c. Profits in home remodeling? Why?

2. When McDonald's Corp. reduced the price of its Big Mac by 75 percent if customers also purchased french fries and a soft drink, The Wall Street Journal reported that the company was hoping the novel promotion would revive its U.S. sales growth. It didn't. Within two weeks sales had fallen. Using your knowledge of game theory, what do you think disrupted McDonald's plan?

Solution Preview

1.
a) Because my firm is making a profit, other firms will enter the industry. This will increase the demand for resources such as lumber, increasing its price. My costs will increase.
b) The increased ...

Solution Summary

The topics covered are long-run equilibrium in an increasing-cost industry, arguing an antitrust case before the federal trade commission and game theory in an oligopolistic industry. 135 words.

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