Self CheckQuestions

1-Firms in a perfectly competitive market are said to be "price takers"that is, once the market determines an equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market, but you are not happy with its price, would you raise the price, even by a cent?

3-Look atTable 8.13. What would happen to the firm's profits if the market price increases to $6 per pack of raspberries?

7- If new technology in a perfectly competitive market brings about a substantial reduction in costs of production, how will this affect the market?

Critical Thinking Questions

33- Since a perfectly competitive firm can sell as much as it wishes at the market price, why can the firm not simply increase its profits by selling an extremely high quantity?

38- In the argument for why perfect competition is allocatively efficient, the price that people are willing to pay represents the gains to society and the marginal cost to the firm represents the costs to society. Can you think of some social costs or issues that are not included in the marginal cost to the firm? Or some social gains that are not included in what people pay for a good? (Think of the tobacco industry)

Self CheckQuestions

3- Consider the curve shown inFigure 10.6, which shows the market demand, marginal cost, and marginal revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs.

• Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel supply? How much profit will the cartel earn?
• Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will the industry quantity and price be? What will the collective profits be of all firms in the industry?
• Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.

Critical Thinking Questions

15- Make a case for why monopolistically competitive industries never reach long-run equilibrium.

18- When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long termthat 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.

Problem

21- 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 30 years. If neither confesses, they will each receive a 20-year sentence. If only one confesses, the confessor will receive 15 years and the one who stayed silent will receive 35 years.Table 10.7below 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.)

Quantity 0 1O 20 30 40 50 60 70 80 90 100 Table 8.13 Total Cost $62 $90 $110 $126 $144 $166 $192 $224 $264 $324 $404 Fixed Cost $62 $62 $62 $62 $62 $62 $62 $62 $62 $62 $62 Variable Cost $28 $48 $64 $82 $104 $130 $162 $202 $262 $342 Total Revenue $0 $60 $120 $180 $240 $300 $360 $420 $480 $540 $600 Prot $62 -$30 $10 $54 $96 $134 $168 $196 $216 $216 $196