Not collected or graded. For final exam practice only.

# Concepts and Critical Thinking

Please answer the following questions briefly (1-3 sentences). Use examples as necessary. Be sure to label graphs fully, if appropriate.

## Question 1

Compare and contrast the features of

1. perfect competition
1. monopoly
1. oligopoly
1. monopolistic competition

Rank each of the above 4 market structures (from smallest/lowest to largest/highest) in terms of:

1. the number of firms
1. long-run market price
1. equilibrium industry output
1. consumer surplus
1. long-run economic profits

## Question 2

Indicate based on the given information whether an industry is likely perfectly competitive, monopolistically competitive, an oligopoly, or a monopoly:

• Fairfax, Virginia has three movie theaters
• Restaurants in the greater Piedmont area, with many different cuisines to choose from
• All of Connecticut gets its electricity from Connecticut Light & Power company
• Laptops, where you can choose from many different brands (Acer, Asus, Gateway, Toshiba, Sony, HP, Dell, IBM, Lenovo, etc) and each is slightly different
• Wheat in the U.S., provided by many small farmers, with each farmer’s wheat being identical to every other farmer’s wheat
• The music industry, where Universal, Sony, EMI, and Warner account for 87% of the market

## Question 3

Indicate which good is more likely to have a higher markup for firms with market power in these industries, and why:

• Alcohol or jewelry
• Prescription drugs or televisions
• Gym memberships or school supplies
• Popcorn in a movie theater or popcorn from a street vendor

## Question 4

Describe the conditions required to make a market contestable. Describe and compare the Nash equilibrium of a contestable market with a pure monopoly, and with perfect competition.

## Question 5

Explain what a cartel is, and comment on their stability.

# Problems

Show all work for calculations. You may lose points, even if correct, for missing work. Be sure to label graphs fully, if appropriate.

## Question 6

Consider the following Entry game in normal form. Suppose there are two firms, each of whom can choose to Enter a market, or Stay Out. If both firms enter, they split the market, each earning $50. If both stay out, each firm earns$0. If one enters and the other stays out, the entrant can act as a monopolist and earns $100, with the other firm earning$0.

What is the Nash Equilibrium of this game?

## Question 7

### Part A

Find the marginal revenue curve for the monopolist.

### Part B

Find the profit-maximizing level of output and price.

### Part C

How much profit does the monopolist earn?

### Part D

How much of the price is markup over marginal cost?

### Part E

Calculate the elasticity of demand at the profit-maximizing price.

## Question 10

Optional: Section 1 (M/W) covered price discrimination in 4.3 but we did not do any example problems. There will be no calculation problems requiring this on the final exam for either section.

Consider a boat rental firm on a popular beach that has a constant average and marginal cost of \$30 per boat hire. It has estimated that demand from Locals $$(L)$$ and demand from Tourists $$(T)$$ are: \begin{align*} q_L&=40-0.4p\\ q_T&=25-0.1p\\ \end{align*}

### Part B

How much of the price is markup?

### Part C

What is the price elasticity of demand at this price?

### Part D

Now suppose the firm is able to segment the market and charge different prices to Tourists and Locals. Find the profit-maximizing quantity, price, and the total profits.

### Part E

For each segment of the market: how much of the price is markup, and what is the price elasticity of demand at the optimal price? How did the price for each segment change from the single price (Part A), and why?