1) Lentz's, Incorporated sells paper in a perfectly competitive market at a price of $2 per ream. At the profit-maximizing (cost-minimizing) level of output, average total cost is $2.50 per ream and average variable cost is $1.95 per ream. Should the firm continue to operate in the short run? Explain.
2) Suppose the widget industry is perfectly competitive. A monopoly purchases all widget producers in the market. List three ways in which the market outcome under monopoly will differ from the market outcome under perfect competition.
3) Why do existing firms earn smaller profits as new firms enter an industry?
4) Consider the decision tree depicted in Figure 12.4 concerning a collusive agreement between firms owned by Bob and Donna. Each participant has the option of following the terms of the agreement or cheating on the terms of the agreement, but neither knows what the other will do. What is the dominant strategy for Bob? For Donna? Which strategy should player, Bob and Donna, choose to maximize the potential gain? What do you think the outcome of this game will be? Carefully explain your answers.