Principles of Economics (Second Edition)
2nd Edition
ISBN: 9780393614077
Author: coppock, Lee; Mateer, Dirk
Publisher: W. W. Norton & Company
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Question
Chapter 13, Problem 1QFR
To determine
The comparison of the
Expert Solution & Answer
Answer to Problem 1QFR
Oligopoly:
P>MR
A price decrease is followed by the competitor but a price increase is not followed.
Monopoly:
At equilibrium, P>MR (=MC)
Monopolistic Competition:
At equilibrium, Price, P=AC and P>MR (=MC)
Explanation of Solution
We shall first discuss certain features for the market structures:
Oligopoly:
- Few sellers exist.
- Products may be differentiated or homogeneous.
- industry output is by a few firms.
- advertisement and selling costs.
- strategic interdependence of firms.
- natural or technical barriers to entry.
- Kinked demand curve due to interdependence among firms.
- A price decrease is followed by the competitor, but a price increase is not followed.
- Supernormal profits
Monopoly:
- only a single seller exists
- product is differentiated.
- low price elastic of demand for own good i.e.
inelastic demand for own good - very low cross-
price elasticity of demand i.e. no close substitutes exist - strong barriers to entry (natural or technical)
- supernormal profits in the long run
Monopolist Competition:
- existence of large number of sellers.
- free entry and exit of firms.
- products are differentiated.
- existence of selling costs.
- cross-price elasticity of demand is high but not very high
- only normal profits in the long run.
Now, let's define the output and price determination conditions for each market.
Oligopoly:
Equilibrium condition:
MR=MC
P>MR
A price decrease is followed by the competitor but a price increase is not followed.
Equilibrium price corresponds to the kink in the demand curve.
Monopoly:
Equilibrium condition:
-MR=MC
-Slope of MC > slope of MR
At equilibrium, P>MR (=MC)
Monopolistic Competition:
Equilibrium condition:
-MR=MC
-Slope of MC > slope of MR
At equilibrium, Price, P=AC and P>MR (=MC)
Economics Concept Introduction
Oligopoly: Oligopoly is a market structure where only a few sellers exist and products may be differentiated or homogeneous.
Monopoly: Monopoly is a market structure where only one seller exists, and product is differentiated.
Monopolist Competition: Monopolistic competition is a market structure where large number of sellers exist and products are differentiated.
Total Revenue (TR): Total revenue is the total proceeds from the sale of a given level of output.
Total Cost (TC): Total cost is the total outlay in the production of a given level of output.
Marginal Revenue (MR): Marginal revenue is the additional revenue generated by the sale of an additional unit of output.
Marginal Cost (MC): Marginal cost is the addition to total cost when an extra unit of output is produced.
Average Cost (AC): Average cost is defined as total cost divided by the corresponding level of output.
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Chapter 13 Solutions
Principles of Economics (Second Edition)
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