Q1. Assume We Are the Stuff is a monopoly in a local market that is earning economic profit. Draw an accurately labeled graph for We Are the Stuff. Identify the following:

• label each axis and the marginal revenue (MR), demand (D), marginal cost (MC), and average total cost (ATC) curves
• the profit-maximizing price, Pm
• the profit-maximizing output, Qm
• shade the area of economic profit
• label the area of deadweight loss (DWL) and the area of consumer surplus (CS)

Q2. How is a price-discriminating monopoly different from a monopoly without this ability?

Assume We Are the Stuff is now a perfectly price discriminating monopoly. Draw an accurately labeled graph for We Are the Stuff. Identify the following:

• label each axis and curve
• the profit-maximizing output, Qm
• shade the area of producer surplus

Q3. How is the graph for monopolistic competition different from monopoly?

How is it similar to and different from perfect competition?

Assume We Have Better Stuff in New Colors is a monopolistically competitive firm incurring economic losses. Draw an accurately labeled graph for We Have Better Stuff in New Colors. Identify the following:

• label each axis and curve
• the profit-maximizing quantity (Qm) and profit-maximizing price (Pm)
• shade the area of loss

Assume We Have Better Stuff in New Colors stays in the market; what will happen in the long run?

Q4. Explain why firms in oligopoly have an incentive to cooperate and form cartels.

Why do oligopolies struggle to reach the monopoly outcome?

Two firms, Excellent Stuff and Interesting Stuff, each plan to open a new factory. There are available locations on the east side and west side of the city. The payoff matrix below shows the daily profits of each company based on location chosen.

INTERESTING STUFF

EAST WEST

EAST $2,400, $1,300 $1,500, $1,700

EXCELLENT STUFF

WEST $2,800, $2,000 $2,200, $1,900

What will Interesting Stuff's daily profits be if it opens a factory on the eastern side while Excellent Stuff opens a factory on the western side?

Does Excellent Stuff have a dominant strategy? Explain using values from the table.

Does Interesting Stuff have a dominant strategy? Explain using values from the table.

What is the Nash equilibrium in this scenario? Explain.

The city imposes an additional $500 property tax on commercial businesses on the western side of the city. Redraw the matrix showing the impact of this tax on each firm's daily profits.

Has either firm's dominant strategy changed? Explain.

Has the Nash equilibrium changed? Explain.