Chapter 10: Q.9 (page 252)
If the firms in a monopolistically competitive market
are earning economic profits or losses in the short run, would you expect them to continue doing so in the long run? Why?
We cannot expect businesses to make long-term economic profits or losses in a monopolistically competitive market.
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Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm
(Firm A) is large and the other firm (Firm B) is small, as the prisoner’s dilemma box in Table 10.4 shows.
| Firm B colludes with firm A | Firm B cheats by selling more output | |
| Firm A colludes with firm B | A gets \(1000,B gets \)100 | A gets \(800, B gets \)200 |
| Firm A cheats by selling more output | A gets \(1050, B gets\)50 | A gets \(500, B gets \)20 |
Assuming that both firms know the payoffs, what is the likely outcome in this case?
Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic
competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm’s profit, what will happen to the original firm’s profit-maximizing price and output levels?
When OPEC raised the price of oil dramatically in the mid-, experts said it was unlikely that the cartel could stay together over the long term—that the incentives for individual members to cheat would become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.
Make a case for why monopolistically competitive industries never reach long-run equilibrium.
Jane and Bill are apprehended for a bank robbery. They are taken into separate rooms and questioned by the police about their involvement in the crime. The police tell them each that if they confess and turn the other person in, they will receive a lighter sentence. If they both confess, they will be each be sentenced to years. If neither confesses, they will each receive a -year sentence. If only one confesses, the confessor will receive data-custom-editor="chemistry" years and the one who stayed silent will receive years. Table below represents the choices available to Jane and Bill. If Jane trusts Bill to stay silent, what should she do? If Jane thinks that Bill will confess, what should she do? Does Jane have a dominant strategy? Does Bill have a dominant strategy? A = Confess; B = Stay Silent. (Each results entry lists Jane’s sentence first (in years), and Bill's sentence second.)
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