(a) lower prices for consumers (b) more firms in the industry (c) smaller output per firm (d) all of the above (e) none ofthe above.

40. Product differenUation under monopolisdc competidon implies that; (a) individual firms face

downward sloping demand curves (b) both marginal cost and marginal revenue will increase as output increases (c) firms can make economic profits in the long run (d) firms will produce at minimum average total cost (e) none of the above.

NOTES

SECTION vn ANSWERS TO QUESTIONS

Warm-up questions: A(e). (d). (e). D (e). E (b). F(a). G(e). H (b). I (d). J (a).

General questions: 1 (d). Glass producdon leaves litde scope for product differentiation. 2 (c). Since in long run equilibrium is falling, MC must be below it. 3 (e). In a joint profit maximizing cartel, price would be greater than each firms marginal cost 4 (d). The wage claim will raise die MC curve, but if its not too big a shift, it will continue to pass though the discontinuity in the MR curve. 5 (b). For each firm MR > MC. 6 (b). Economies of scale important.

7 (d). Although in equilibrium MC is equal, the higher cost producer, Iran, will produce the smaller output.

8 (e). See text 9 (c). See text. 10 (e). is falling at equilibrium output. (b). In this case, the indus-tiy could not be minimizing the TC of industry production and hence could not be maximizing joint profit. 12 (d). Follows whenever a firm faces a downward sloping demand curve. 13 (d). Check the definition of such an industiy. 14 (e). In the long run, entry will prevent economic profits. 15(b). An effect caused by the leftward shift of the demand curve. 16 (e). All may normally be expected but (e). As explained in the previous section, the cartel coiddnt be maximizing joint profits in this case. It could increase its joint profit by moving to the elastic region of the demand curve. 17 (e). Check that (b) is the wrong way around. 18 (c). These firms cannot be price-t2diers since their price is based on something

other than the marginal cost of the job. They are price discriminating, and apparently those with valuable cars are reladvely inelasdc demanders. 19 (a). Mam firms. If the product is perceived as effecdvely identical, price competition will be strong. 20 (a). MC > MR, so cut back. This is die same as raising price. 21 (a). A possibility in kinked demand oligopoly 22 (c). Profits will be competed away in the long run. 23 (e). Litde opportunity for product differentiation. 24 (f). This is a small number of firms sharing a high per-cente of the market, so its an oligopoly. We cannot say anything about the kind of oligopoly it is without further information. 25 (a). Initially few firms, but no barriers to entry. 26 (e). Other firms will match the cut. 27(a). Otherwise monopolistic competition. 28 (a). Similar to 25. 29 (b). See text 30 (a). Max TR means MR = 0, .so profits are not maximized. Chances are the firm would be unable to cover its costs. 31 (e). Answer (a) isjust another way of saying hed produce where is falling. 32 (d). In long run equilibrium, the monopolistic competitors demand curve is tangent to his curve. Hence P = and profit is zero. 33 (e). See text. 34 (c). Just another way of saying their demand curves slope down. 35 (b). See text. 36 (a). Cartelists make their profit by restricting output in order to achieve higher prices. If demand is highly elastic, they will sell drastically fewer units by raising the price. In the extreme case, where demand is perfecdy elastic, they wont be able to sell anything at all. 37 (e). All have downward sloping demands. 38 (e). P = , but not at the minimum point. 39 (d). See text 40 (a). See text.