1. A monopolistically competitive sneaker firm is currently in long-run equilibrium.
2. Graph the firm in long-run equilibrium. Be sure to label all of the curves and the profit-maximizing price and quantity.
3. The price of the rubber decreases. Rubber is a major component in the production of sneakers. Draw a new graph that shows the change in the profit-maximizing price and quantity of sneakers. Be sure to shade the area of loss or profit.
4. A perfectly competitive potato farm is currently in long-run equilibrium.
5. Graph the firm in long-run equilibrium. Be sure to label all of the curves and the profit-maximizing price and quantity.
6. The demand for potatoes increases. Draw a new graph that shows the impact on an individual firm. Be sure to shade the area of loss or profit.
7. Draw a new graph that shows how the firm and the industry adjusts to a new long-run equilibrium.
8. How did the price and quantity in part A change in Part C? Explain your response.

Market Structure Discussion

John and Anne are the only two suppliers of snacks at school while everyone waits for a ride after sports and clubs. Each student can choose to set a high price or a low price for their goods. The payoff matrix below shows the daily profits for each combination of prices that John and Anne could set. The first entry shows Anne's profits, and the second entry shows John's profits. Assume that both students know the information shown in the matrix. Study the matrix, and then answer the questions that follow.

John

High Price

Low Price

Anne

High Price

$21, $22

$8, $26

Low Price

$24, $16

$15, $14

1. Do John and Anne each have a dominant strategy to set a high price, a dominant strategy to set a low price, or no dominant strategy?
2. Anne
3. John
4. If John and Anne do not cooperate on price setting, what will be the profit for each of them?
5. Anne
6. John
7. A club sponsor with hungry students agrees to pay $4 to John and Anne each if they charge the lower price for their snacks. Redraw the payoff matrix with this subsidy.