Tuesday, April 7, 2015

Case / Fair - Chapter 14 - 1-3-9-12

Chapter 14 - 1-3-9-12

This is a guidance answer ... your actual answer during the exam should be longer than this answer ...

1.     (a)    and (d) are probably oligopolies dominated by a few firms: (b), (c), and (e) are clearly monopolistically competitive because there is lots of product differentiation, many firms, and lots of entry and exit.
3.     Shipbuilding and wine production: not contestable. Both require large investments of land and capital that cannot easily be moved to another location or another industry. Trucking is contestable because it’s easy to move trucks to new locations. Housecleaning services are contestable because they require a very small initial investment.
9.     (a)    Disagree. In contestable markets, oligopolies will be charging competitive prices. Even when oligopolies charge prices above competitive levels, they will sometimes deliver a more innovative stream of products and/or allow scale economies to be realized.
        (b)    Disagree. The existence of a fringe of small firms is relatively common in oligopolies and does not vitiate the market power of the larger firms.
12.    You should agree with this statement. Collusion occurs when price- and quantity-fixing agreements among producers are explicit. If all firms in the industry explicitly agree on fixing the price and quantity in the industry, they will produce where the industry marginal revenue is equal to the marginal cost. In essence, they will be acting as one monopolistic firm.

Courtesy of Case/Fair/Oster, 11th edition, 2014



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