Economics (McConnell), 18th Edition
Monopolistic Competition and Oligopoly (+ Appendix)
1. Compare the elasticity of the monopolistic competitor's demand with that of a pure competitor and a pure monopolist. Assuming identical long-run costs, compare graphically the prices and outputs that would result in the long-run under pure competition and under monopolistic competition. Contrast the two market structures in terms of productive and allocative efficiency. Explain: "Monopolistically competitive industries are characterized by too many firms, each of which produces too little."
2. Answer the following questions, which relate to measures of concentration:
- What is the meaning of a four-firm concentration ratio of 60 percent? 90 percent? What are the shortcomings of concentration ratios as measures of monopoly power?
- Suppose that the five firms in industry A have annual sales of 30, 30, 20, 10, and 10 percent of total industry sales. For the five firms in industry B, the figures are 60, 25, 5, 5, and 5 percent. Calculate the Herfindahl index for each industry and compare their likely competitiveness.
3. Explain the general meaning of the following profit payoff matrix for oligopolists C and D. All profit figures are in thousands.
- Use the payoff matrix to explain the mutual interdependence that characterizes oligopolistic industries.
- Assuming no collusion between C and D, what is the likely pricing outcome?
- In view of your answer to 8b, explain why price collusion is mutually profitable. Why might there be a temptation to cheat on the collusive agreement?
4. What assumptions about a rival's response to price changes underlie the kinked-demand curve for oligopolists? Why is there a gap in the oligopolist's marginal-revenue curve? How does the kinked-demand curve explain price rigidity in oligopoly? What are the shortcomings of the kinked-demand model?
5. Why is there so much advertising in monopolistic competition and oligopoly? How does such advertising help consumers and promote efficiency? Why might it be excessive at times? Chapter 11 Key Question Solutions