Question 1

Compare and contrast the features of

• 1. perfect competition
• 2. monopoly
• 3. oligopoly
• 4. monopolistic competition

Rank each of the above 4 market structures (from smallest/lowest to largest/highest) in terms of:

• 1. the number of firms
• 2. long-run market price
• 3. equilibrium industry output
• 4. consumer surplus
• 22. long-run economic profits
• 6. deadweight loss

Question 2

Indicate based on the given information whether an industry is likely perfectly competitive, monopolistically competitive, an oligopoly, or a monopoly:

• Fairfax, Virginia has three movie theaters
• Restaurants in the greater Piedmont area, with many different cuisines to choose from
• All of Connecticut gets its electricity from Connecticut Light & Power company
• Laptops, where you can choose from many different brands (Acer, Asus, Gateway, Toshiba, Sony, HP, Dell, IBM, Lenovo, etc) and each is slightly different
• Wheat in the U.S., provided by many small farmers, with each farmer’s wheat being identical to every other farmer’s wheat
• The music industry, where Universal, Sony, EMI, and Warner account for 87% of the market

Question 3

Indicate which good is more likely to have a higher markup for firms with market power in these industries, and why:

• Alcohol or jewelry
• Prescription drugs or televisions
• Gym memberships or school supplies
• Doughnuts or bread
• Popcorn in a movie theater or popcorn from a street vendor

Question 4

Describe the conditions required to make a market contestable. Describe and compare the Nash equilibrium of a contestable market with a pure monopoly, and with perfect competition.

Question 5

Explain what a cartel is, and comment on their stability.

Question 6

Consider the following Entry game in normal form. Suppose there are two firms, each of whom can choose to Enter a market, or Stay Out. If both firms enter, they split the market, each earning $50. If both stay out, each firm earns $0. If one enters and the other stays out, the entrant can act as a monopolist and earns $100, with the other firm earning $0.

What is the Nash Equilibrium of this game?

Question 7

Suppose you are a restaurant in a monopolistically competitive industry. Your firm has a constant marginal and average cost at $4 per unit.

Question 8

You are a producer of smartphones and have some market power. You have a cost structure:

\[\begin{align*} C(q)&=10q^2+200q+1000\\ MC(q)&=20q+200\\ \end{align*}\]

You estimate the demand for your smartphones to be: \[q=100-0.2p\] where \(q\) is millions of smartphones.

Question 9

Suppose that the market demand for bentonite is given by \[q = 40 - 0.5p\]

where \(q\) tons of bentonite per day and \(p\) is the price per ton. Bentonite is produced by a monopolist at a constant marginal and average total cost of $10 per ton.

Question 10

Consider a boat rental firm on a popular beach that has a constant average and marginal cost of $30 per boat hire. It has estimated that demand from Locals \((L)\) and demand from Tourists \((T)\) are: \[\begin{align*} q_L&=40-0.4p\\ q_T&=25-0.1p\\ \end{align*}\]