# What are the underlying assumptions of perfect competition?

Question

Review 5

1. What are the underlying assumptions of perfect competition?

2. Why is the demand curve of a firm in a perfectly competitive market horizontal?

3. In a perfectly competitive market, where does the firm maximize its profit?

4. True or False? Firms in perfectly competitive markets earn zero accounting profits in the long run.

5. In a perfectly competitive market, who or what sets prices?
Using the following graph, answer questions 6 and 7 (0.5 points per answer).

6. What will the firm do in the short run if the price is:

a. \$14?

b. \$10?

c. \$7?

7. What will the firm do in the long run if the price is:

a. \$14?

b. \$10?

c. \$7?

8. Fill in the following table and answer the following questions. (table = 5 points)

 Y FC (\$) VC (\$) TC (\$) AFC (\$) AVC (\$) ATC (\$) MC (\$) Output Fixed Cost Variable Cost Total Cost Average Fixed Cost Average Variable Cost Average Total Cost Marginal Cost 1 20 10 2 20 15 3 20 18 4 20 22 5 20 28 6 20 39 7 20 56

Assume that price is \$15.

a. Calculate total profit.

9. Complete the following table (2 points).

 Y P (\$) TR (\$) MR (\$) Output Price Total Revenue Marginal Revenue 1 4 2 4 3 4 4 4 5 4 6 4 7 4

Use the following graph and answer questions 10 -13.

10. Using the graph above, how much is output?

11. Using the graph above, how much is total profit?

12. Using the graph above, how much is the most efficient output?

13. Using the graph above, what is the firm’s price in the long run?

Review 6

1. Using the graph above, calculate the firm’s profit or loss.

2. Using the graph above, if this firm were a perfect competitor, what is the lowest price it would accept in the long run?

3. Using the graph above, is the firm a perfect competitor? Explain how you came to your answer.

4. (6 points) Complete the following table.

 Y P (\$) TR (\$) MR (\$) TC (\$) ATC (\$) MC (\$) Output Price Total Revenue Marginal Revenue Total Cost Average Total Cost Marginal Cost 1 33 30 2 31 45 3 29 55 4 27 61 5 25 66 6 23 72 7 21 81 8 19 96

5. Using the table above, calculate the firm’s total profit or loss.

6. (4.5 points) Label the following in the graph below: Marginal Cost Curve, Marginal Revenue Curve, Demand Curve, Deadweight loss, Lost Consumer Surplus, Price in Perfect Competition, Monopolist Price, Monopolist Quantity, and Perfect Competition Quantity.

PRICE

OUTPUT

8. (3.5 points) What are the barriers to entry?

9. What is the distinguishing characteristic of imperfect competition?

Review 7

1. (2 points) Using the graph above, calculate the profit (P – ATC * Output).

a. Is this monopolistically competitive firm in the short run or long run?

b. If the firm were a perfect comeptitor in the long run, what would be the lowest price it would accept?

2. (3 points) What are the main characteristics of monopolistic competition?

3. True or False? Firms competing in a monopolistically competitive market earn zero economic profits in the long run.

4. True or False? Monopolistically competitive firms face relatively inelastic demand curves.

5. (2 points) What is product differentiation? Why is it important to firms?

6. What is the one feature that distinguishes perfect competition from monopolistic competition?

7. (3 points) Name three products that face a monopolistically competitive market.

8. What is price discrimination?

9. (3 points) Give three examples of price discrimination.

10. Why is perfect competition better than monopolistic competition?

Review 8

1. What are two examples of oligopolistic industries?

2. True or False? Firms in oligopolies are interdependent upon one another.

3. Does an oligopoly charge a price indicative of monopolistic competition or perfect competition?

4. (2 points) Why does an oligopolist engaged in cutthroat competition have a kinked demand curve?

5. (2 points) A monopoly would have a concentration ratio of __________________ and a Herfindahl-Hirschman index of ___________________.

6. Which statement is true?

a. The higher the HHI, the higher the degree of concentration.

b. The lower the HHI, the higher the degree of concentration.

c. The HHI remains constant as the degree of concentration rises.

d. There is no relationship between the HHI and the degree of concentration.

7. (2 points) The kinked demand curve is associated with:

a. sticky prices

b. OPEC

c. covert collusion

d. none of the above

8. (2 points) Use the following table to calculate the concentration ratio and the Herfindahl-Hirschman Index.

 Firm Market Share % A 20 B 20 C 15 D 10 E 10 F 5 G 5 H 5 I 5 J 5 Total 100%
9. (2 points) In the game shown below, firms 1 and 2 must independently decide whether to charge high or low prices.

Which of the following are Nash equilibrium payoffs?

 A. (0, 0)
 B. (5, -5)
 C. (-5, 5)
D. (10, 10)
For the following questions, create a payoff matrix to solve the games.

10. (2 points) Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn \$5 million in profits. If neither of you advertises, you will each earn \$10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn \$15 million and the non-advertising firm will earn \$1 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is:

 A. for each firm to advertise.
 B. for neither firm to advertise.
 D. None of the answers is correct.
11. (2 points) Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn \$5 million in profits. If neither of you advertises, you will each earn \$10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn \$15 million and the non-advertising firm will earn \$1 million. If you and your rival plan to be in business for 10 years, then the Nash equilibrium is:

 A. for each firm to advertise every year.
 B. for neither firm to advertise in early years, but to advertise in later years.
 C. for each firm to not advertise in any year.
 D. for each firm to advertise in early years, but not advertise in later years.

12. (2 points) Consider the following entry game: Here, firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play “enter”) or stay out of the market (play “not enter”). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play “hard”), or not (play “soft”). By playing “hard,” firm B ensures that firm A makes a loss of \$1 million, but firm B only makes \$1 million in profits. On the other hand, if firm B plays “soft,”, the new entrant takes half of the market, and each firm earns profits of \$5 million. If firm A stays out, it earns zero while firm B earns \$10 million. Which of the following are Nash equilibrium strategies?

 A. (enter, hard) and (not enter, hard)
 B. (enter, soft) and (not enter, soft)
 C. (not enter, hard) and (enter, soft)
 D. (enter, hard) and (not enter, soft)