1) How will managers of a monopolistically competitive firm decide on the optimal level of production? Elucidate.
2) Describe market forces that come into play in the short run if a monopolistically competitive firm is making a positive economic profit. How would this compare to the typical long-run equilibrium? Explain.
3) True, False Uncertain and Explain: "Happy hour" pricing by bars and restaurants (i.e., lower prices at the close of the business day) is not a logical outcome. The increase in demand for food and beverages around 5:00 p.m. should actually result in higher prices.
4) Mary and Sam are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn $100. If they decide to work together and both lower their output, they can each earn $150. If one person lowers output and the other does not, the person who lowers output will earn $0 and the other person will capture the entire market and will earn $200. {The table below represents the choices available to Mary and Sam.}
What is the best choice for Sam if he is sure that Mary will cooperate?
If Mary thinks Sam will cheat, what should Mary do and why?
What is the prisoner's dilemma result?
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Mary
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A
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B
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A
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($100, $100)
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($200, $0)
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Sam
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B
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($0, $200)
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($150, $150)
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Note: A = Work independently; B = Cooperate and Lower Output. Each table entry lists Sam's earnings first, and Mary's earnings second.