1. Monopolistic competition refers to a market in which old boys act naturally as they transport tight slacks in the back of Dodge Ram pickup trucks. ___________ (True/False)

2. There are ___________oxymorons in question 2.1.

3. There are two conditions for a long-run equilibrium in a monopolistically competitive market:

(1) ___________equals___________ and (2) ___________equals___________.

4. To enter the donut market as a seller of Dunkin Donuts, you’ll pay a one-time franchise fee of $ ___________and then pay ___________percent of your sales.

5. Willingness to Pay for a Dunkin Donuts Franchise. You operate a Dunkin Donuts shop under a franchise agreement. You pay a royalty of 6 percent of your sales revenue to the parent company. Your profit-maximizing quantity is 10,000 donuts per year, and at this quantity your price is $1.00 and your average cost per donut (including all the opportunity cost of production but not the 6 percent royalty) is $0.44.

a. Draw a graph with revenue and costs curves to show your profit-maximizing choice.

b. What is the maximum amount you are willing to pay per year for the franchise?

6. How Many Book Stores? The city of Bookburg initially allows only one book store, which sells books at a price of $20 and an average cost of $11. Suppose the city eliminates its restrictions on book stores, allowing additional stores to enter the market. According to an expert in the music market, Each additional music store will decrease the price of books by $2 per book and increase the average cost of selling books by $1 per book. Predict the equilibrium number of book stores.

7. Lawn-Cutting Equilibrium. Consider the market for cutting lawns. Each firm has a fixed daily cost of $18 for equipment, and the marginal cost of cutting a lawn is $4. Suppose each firm can cut up to three lawns per day. The market demand curve for lawn cuts is linear, with a vertical intercept of $70 and a slope of $1 per lawn.

a. If each firm in the market cuts three lawns, what is the average cost per lawn?

b. What is the equilibrium price under monopolistic competition?

c. How many lawns will be cut in total, and how many firms will be in the market?

8. Zero Price for a Permit. Consider a city that initially issues five licenses to pet groomers and does not allow the licenses to be bought and sold. Shortly after an economist joins the city licensing authority, the city decides to allow the licenses to be bought and sold on the open market. Much to the surprise of the licensers, the price of the licenses was zero: No one was willing to pay a positive amount for a pet grooming license.

a. Explain why the price of grooming licenses was zero.

b. Illustrate your answer with a complete graph.

9. Auctioning Business Licenses. The following table shows the relationships between the number of firms in the market, the market price, the quantity per firm, and the average cost of production.

A business license allows a firm to operate the business for one day. The city will auction up to seven business licenses to the highest bidders, and the auctioning of licenses will continue as long as someone bids a positive amount for one of the licenses. Assume that each firm can buy only one license. What is the maximum amount you would be willing to pay for alicense?

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Number of Firms Price Quantity per Firm Average Cost $20 18 16 14 12 10 38 35 32 29 26 23 20 10 12 13 15