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Chapter 10: Q.1 (page 251)

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

Short Answer

Expert verified

Because of this situation, the prices of the product sold by the monopolistic competitor will increase.

Step by step solution

01

Step 1. Explanation.

Because of the successful advertising, the demand for the product rises the monopolistic competitor will increase the price of the product to earn more profit on the given quantity of product because in economics seller have a mind of earning more profits and here the demand is also in favor of the seller or monopolistic competitor.

02

Step 2.Graphical behavior.

A rightward movement in the demand curve and a rightward change in marginal revenue will occur as demand rises. The marginal cost curve will go upward as the marginal income curve shifts. The new pricing should be more expensive. The move along the average cost curve to a higher level of average cost will be caused by the rise in quantity. The price will rise, resulting in a rise in overall earnings.

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Most popular questions from this chapter

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm

(Firm A) is large and the other firm (Firm B) is small, as the prisoner’s dilemma box in Table 10.4 shows.


Firm B colludes with firm AFirm B cheats by selling more output
Firm A colludes with firm B
A gets \(1000,B gets \)100A gets \(800, B gets \)200
Firm A cheats by selling more outputA gets \(1050, B gets\)50A gets \(500, B gets \)20

Assuming that both firms know the payoffs, what is the likely outcome in this case?

Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn \(100. If they decide to work together and both lower their output, they can each earn \)150. If one person lowers output and the other does not, the person who lowers output will earn \(0and the other person will capture the entire market and will earn \)200. Table 10.6represents the choices available to Mary and Raj. What is the best choice for Raj if he is sure that Mary will cooperate? If Mary thinks Raj will cheat, what should Mary do and why? What is the prisoner’s dilemma result? What is the preferred choice if they could ensure cooperation? A = Work independently; B = Cooperate and Lower Output. (Each results entry lists Raj’s earnings first, and Mary's earnings second.)

RAJ MARY
(A) (B)
(\(100,\)100) (\(200,\)0)
(\(0,\)200) (\(150,\)150)

Consider the curve in the figure below, which shows the market demand, marginal cost, and marginal revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs.

a. Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel

supply? How much profit will the cartel earn?

b. Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will be the industry quantity and price? What will be the collective profits of all firms in the industry?

c. Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.

Will the firms in an oligopoly act more like a

monopoly or more like competitors? Briefly explain.

When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term—that the incentives for individual members to cheat would become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.
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