ECON 1000V

____ 6. Declining average total cost with increased production is one of the defining characteristics of a natural

monopoly.

____ 7. Product differentiation generally leads to some measure of market power.

____ 8. Suppose the government of Italy will not allow any restaurants from a leading North American chain to open

in Italy. Defenders of the efficiency of brand-name markets would argue that this has hampered restaurant

market efficiency in Italy.

____ 9. Larger cartels have a greater probability of reaching the monopoly outcome than do smaller cartels.

____ 10. There are some logical economic arguments in favour of resale price maintenance.

SECTION C: FREE RESPONSE QUESTIONS. TOTAL MARKS: 40.

ANSWER TWO OF THE FOLLOWING THREE QUESTIONS:

INSTRUCTION: Take a few minutes to plan and outline each answer. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include diagrams, if useful, in explaining your answers. All diagrams should be correctly labeled.

Question C1 (20 marks):

C1.1

1.1 Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms

are experiencing economic losses. (4 marks)

1.2 Identify costs, revenue, and the economic losses on your graph. (3 marks)

1.3 Using your graph, determine whether this firm will shut down in the short run or choose to remain in the

market. Explain your answer. (3 marks)

C1.2.

- Complete the following total for marginal cost. (3 marks)

- How many units of output should this monopoly firm produce in order to maximize its profits? (3 marks)

- What is the market price of the product, and what is the maximum profit? (4 marks)

Quantity

Sold Price

Marginal

Revenue

Total

Cost

Marginal

Cost

0 20 – 5

1 19 19 7

2 18 17 10

3 17 15 14

4 16 13 19

5 15 11 25

6 14 9 32

7 13 7 40

8 12 5 49

9 11 3 59

10 10 1 70

Question C2. 20 marks.The graph below shows the demand curve (D), marginal revenue curve (MR), mar-

ginal cost curve (MC), average total cost curve (ATC), and long-run average total cost curve (LRATC) for a

monopolist.

Using the numbers given in the graph, identify each of the following for the profit-maximizing monopo-

list.

(a) The quantity produced

(b) The price

(c) The allocatively efficient quantity

(6 marks)

(d) At the profit-maximizing quantity from part (a) is the monopolist experiencing economies of scale? Ex-

plain (2 marks)

Now assume that the monopolist produces 10 units. Using the numbers given in the graph, calculate each of the following. Show your work.

(e) The monopolist’s economic profit

(f) The consumer surplus

(g) The deadweight loss

(6 marks)

(h) At what quantity is demand unit elastic?

(2 marks)

Suppose the monopolist perfectly price discriminates and chooses the quantity that maximizes profit.

Determine the dollar value of each of the following.

(i) The monopolist’s profit

(j) The consumer surplus (4 marks)

Question C3 (20 MARKS)

Question C3A: Prisoner’s dilemma

Question a1: What is prisoner’s dilemma? Explain the idea/dilemma in terms of the following story ( 4

marks):

Bonnie and Clyde have been captured. The police have enough evidence to convict them on a weapons

charge (sentence = 1 year), but suspect that they have been involved in a bank robbery. Because they lack

hard evidence in the crime, they need at least one of them to confess.

The police lock the two in separate rooms and offer each of them a deal: “We can lock you up for 1 year.

However, if you confess to the bank robbery and implicate your partner, we will give you immunity. You

will go free and your partner will get 20 years in jail. If you both confess, we won’t need your testimony

and will avoid the cost of a trial, so you will both get 8 years.”

Questions:

a2. What is Bonnie’s dominant strategy and why? Explain (2 marks)

a3. What is Clyde’s dominant strategy and why? Explain (2marks)

a4. Would both the better off if they had remained silent? Explain. What leads them to break silence leading

to an inferior outcome? (3 marks)

Question C3B. Oligopolies as a Prisoners’ Dilemma