Monopolistic Competition and Oligopoly

Free Response

Directions:Answer both questions correctly on a separate sheet of paper.Be sure to label your graphs completely.

1.Assume that the Internet connection industry is monopolistically competitive.

A)Assume that the Internet Connector Firms are earning short-run economic losses.Draw a correctly labeled graph for a typical firm in the industry and show each of the following.

i)The profit maximizing output and price

ii)The area representing economic loss

B)At the profit maximizing output is the demand curve elastic, inelastic or unit elastic?Explain.

C)Given the information in part (A), what happens to the typical firms demand curve in the long-run?Explain.

D)Using a new graph, show the typical firm in long-run equilibrium.

E)Does this firm produce an output level that minimizes is ATC?Explain.

F)Is this firm allocatively efficient in the long-run?Explain.

2.Two competing retail firms, Red Shop and Blue Mart, are studying potential locations for new stores in the suburbs of a major city. Each firm must choose between a location north of the city and a location south of the city. The payoff matrix is shown below, with the first entry in each cell indicating Red Shop's daily profit and the second entry indicating Blue Mart's daily profit. Both firms know all of the information in the payoff matrix.