Name: Key

1.   A monopolistically competitive firm is in long run equilibrium. Its marginal revenue equals $10. If its marginal revenue plus its economic profit equal one half of its price, then its price equals , and its marginal cost equals .When a monopolistically competitive firm is in long run equilibrium its demand curve, downward sloping, is tangent to its average cost curve.  Therefore its economic profit is zero.  Hence, in this problem price is just twice its marginal revenue of $10.  So, Price = $20 and marginal cost = $10

2. Under monopolistic competition we expect that more, the same, or less will be produced at a price more, the same, or less than under pure monopoly.

3. Under monopolistic competition the theory suggests that more, the same, less will be produced at a price more, the same, orless than under perfect competition.

4. In monopolistic competition each firm expects its actions to have no,some impact on its competitors.

 5. In long run equilibrium in monopolistic competition the long run average cost curve is tangent to the demand curve.

6. Excess capacity under monopolistic competition may be fairly small if the demand curve facing the monopolistically competitive firm is elastic, inelastic .

7. All three firms in an industry have marginal cost curves that are horizontal lines at $10 per unit of output. If they combine to form a cartel, the cartel's marginal cost will, will not be $10 per unit. If the cartel maximizes profits, its marginal revenue will be greater than, smaller than, equal to $10 per unit. Price will be greater than, smaller than, equal to $10 per unit of output.

8. (If you get this problem I will add an extra ten points to your homework score. There is no penalty for wrong answers.) Returning to problem 7: Suppose that the demand curve for the oligopolistic industry is P = 25 - Q. How much would each of the firms be willing to pay in order to create the cartel ? 

The market demand is P = 25 - Q. Letting q1, q2, q3 represent the quantities from each firm, the demand curve can be written as P = 25 - (q1+q2+q3).  Marginal revenue for firm 1 will be MR = 25 - 2q1 - q2 - q3, for firm 2 it is MR = 25 -q1-2q2-q3, for firm 3 it is MR = 25 - q1 - q2 - 2q3.  Set each of these to MC = 10 and solve the system of three equations for the three unknown quantities. q1 = q2 = q3 = 3.75 for a total quantity of 11.25. Plug this into the demand curve for a price of 13.75.  The producer surplus for any one of the three oligopolists is (13.75 - 10)(3.75) = 14.0625

Once the firms form a cartel they become a monopolist.  As a monopoly the will equate MR and MC: 10 = 25-2Q.  Solving for quantity we get Q = 7.50, plugging that into the demand curve we get P = 17.50.  As a monopoly cartel they earn producer surplus of (17.5-10)(7.5) = 56.25.  Since there are three of them they would each get 18.75. 

The most that one firm would pay in order to create the cartel would be 18.75-14.0625 = 4.6875