Assignment:
One point questions:
1. Explain why monopolistically competitive firms frequently prefer nonprice to price competition.
2. What purpose does product differentiation serve from a firm's perspective?
3. What purpose does product differentiation serve from society's perspective?
4. Speculate as to why price leadership is legal in the United States, whereas price-fixing is not.
Two point questions:
Suppose that a monopolistically competitive restaurant is currently serving 300 meals per day (the output where MR = MC). At that output level, ATC per meal is $13, AVC per meal is $10 and consumers are willing to pay $14 per meal.
5. What is the size of this firm's profit or loss?
6. Will there be entry or exit?
7. Will this restaurant's demand curve shift left or right as a result?
The payoff matrix of economic profits below displays the possible outcomes for Bob and Jane who are involved in game of whether or not to advertise. After each player chooses his or her best strategy and sees the result,
Jane
Advertise Don't advertise
Bob Advertise J: $6,000
B: $10,000 J: $3,000
B: $20,000
Don't advertise J: $12,000
B: $5,000 J: $10,000
B: $15,000
8. What is the Nash equilibrium?
9. If Bob and Jane colluded, what would be their economic profits?