# Problem Set 6

UNGRADED: 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

#### Part A

Write a function for the marginal cost of labor.

#### Part B

What quantity of workers will the firm hire, and what wage will it pay its workers?

#### Part C

What would the quantity of workers be, and what would the wage be, if the labor market was perfectly competitive?

#### Part D

Calculate the price elasticity of labor supply at the monoposony wage from part C.

#### Part E

Now suppose a new commuter rail service allows workers to cheaply commute to nearby towns to work, making the labor supply curve instead:

$w=0.2L+20$

What quantity of workers will the firm hire, and what wage will it pay its workers?Hint: first find the new $$MC(L)$$ equation.

#### Part F

Calculate the price elasticity of labor supply at the monoposony wage from Part E.

#### Part G

Compare your answers to Parts C & D to Parts E & F. How is market power (and inefficiency) related to price elasticity?