Oligopoly is a common form of big business in America. Automobiles, soft drinks, fast food franchises, cigarettes, beer, and cell phone services all fall into the category of oligopoly.
a. What are the characteristics of an oligopoly? List and explain the three most important characteristics.
b. Many oligopolies are successful in earning economic profit year after year. Identify and explain what characteristic of oligopoly is most responsible for the presence of long-run economic profits.
c. Many oligopolies sell differentiated products. List and explain three ways in which the firm may attempt to differentiate its product and explain why the firm would wish to differentiate its product.
Assume that the following conditions exist for a perfectly competitive firm:
price = $10, current output = 100 units/hour, ATC at current output = $9.00, AVC at current output = $8.00 and MC at current output = $8.00.
a. Is the firm earning any economic profit currently? How much is its profit or loss?
b. Is the firm maximizing its economic profit? How do you know? What should the firm do to maximize profit? Should it increase or decrease output?
c. Given your answers in part b, how will the market adjust to reach long-run equilibrium? What will happen to the economic profit in the long-run? Include appropriate graphs for the market and the typical firm in your explanation.