Question

1. A firm can adjust along two spectrums: price, and quantity supplied. Describe how the firms below would be affected if they made the assigned adjustments. a. Perfect competition, increase in price b. Monopolistic competition, increase in price c. Oligopoly, decrease in price d. Monopoly, increase in quantity supplied, such that it is above equilibrium 2. Solve the Prisoner's Dilemma 3. Illustrate the interaction between long run average cost and demand for a monopoly with economies of scale. 4. Draw the 3 cost curves for a perfectly competitive firm (4, if you are including average fixed cost), and label the following areas: a. Shutdown point b. Breakeven point c. Profit zone d. The output level at which the firm is operating at a loss in the short run 5. You are the head of a firm in a perfectly competitive market. You sell cheese for $5. a. What is your rt? b. What is your marginal revenue? What is your marginal cost? d. What is your average cost? C.

Answer 1

1)a)A perfectly competitive firm is a price taker.Due to the pressure of the competitive firms, a firm is forced to accept the price prevailing in the market.If a single firm increases its price, it will lose its customers and the customers will go to other firms.

b)In a monopolistic competition ,all the firms in the industry offer goods which are similar but not identical.Monopolistic firms are price makers and demand for their products is highly price elastic.In order to increase price in a monopolistic market,the firms should differentiate their product from their competitors by improving the quality of the product.

c)Oligopoly is a market structure with few firms which exert influence on one another.If the oligopoly firm lowers its price all the other firms will also lower their prices and so profit will decrease and revenue will be less..

d) Monopoly is price maker.In a Monopoly , in order to sell more goods prices should fall.An increase in supply will cause equilibrium price to fall and equilibrium quantity to increase.As more goods are supplied in the market,quantity will rise and prices will fall.