Northeastern University

University College

Economic Principles III Due: February 10, 1994

ECN 4117 Winter 1994

Problem Set #2

1. Discuss briefly and illustrate graphically the pricing and output determination process in each of the following markets.

a. Perfect Competition

b. Pure Monopoly

c. Monopolistic Competition

d. Oligopoly

Give five examples of each of these markets. Compare the allocative and productive efficiency of each type of market to that of others.

2. For a competitive firm, with fixed cost equal to $100 and units of output and average variable cost as listed below, calculate marginal cost, total average cost. Find the short-run supply of this firm for each of the following prices: 70, 80, 90, 100, 120, 130, 140. Calculate the profit made by this firm at each price.

. Total output	. Average Variable Cost
0	90
1	85
2	75
3	74
4	75
5	77
6	81
7	87
8	93
9	100
10	105

Suppose demand for this product doubles ( a shift in the demand curve) due to some factor such as increase in income and population and is likely to stay at that level for a long period. How would the long run supply curve of this firm if it is characterized by an increasing cost industry, a constant cost industry, or a decreasing cost industry?

3. Define and graphically illustrate the meaning of consumer surplus and price discrimination. How can a monopolist capture the consumers surplus? Distinguish between the first, second and third degree price discrimination. What are the conditions required for such discrimination and what are the outcomes of such discrimination in terms of prices, level of output and profit of the monopolist?

4. Define the following terms and outline importance of each of those concepts in an oligopolistic industry.

a. Concentration ratio

b. Herfindahl index

c. Pay-off matrix

d. Cartel

e. Gentlemen's agreement

5. Write short notes on each of the following.

a. Traditional view and new perspective on the effect of advertisement on product demand under a monopolistically competitive industry.

b. Total revenue total cost and marginal revenue-marginal cost approach to analyze the pricing and output determination in a perfectly competitive industry.

c. Dead-weight loss due to monopolization of a certain industry.

d. Price-war in an oligopolistic industry.

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Besides this homework and readings of chapter 23,24,25 and 26,

do following questions to prepare for mid-term on Feb. 10, 1995.

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1. Following questions from the text: #7 on page 484, #2 on page 496 and #5, 6 on page 517.

2. There are only two firms in the industry. They collude to share the market equally. They jointly set a monopoly price and split the quantity demanded at that price. Here are their options.

a. They continue to collude (no cheating) and make $10 million each in profit.

b. One firm cheats on the agreement but the other firm doesn't. The firm that cheats makes $12 million a year in profit and the firm that doesn't cheat makes $7 million in profit.

c. They both cheat and each one makes $6 million a year in profit.

Construct a pay-off matrix for these two firms. Does this situation relate to prisoner's dilemma?