Questions:
1) How will managers of a monopolistically competitive firm decide on the optimal level of production? Elucidate.
2) Describe market forces that come into play in the short run if a monopolistically competitive firm is making a positive economic profit. How would this compare to the typical long-run equilibrium? Explain.
3) True, False Uncertain and Explain: "Happy hour" pricing by bars and restaurants (i.e., lower prices at the close of the business day) is not a logical outcome. The increase in demand for food and beverages around 5:00 p.m. should actually result in higher prices.
4) Mary and Sam 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 $0 and the other person will capture the entire market and will earn $200. {The table below represents the choices available to Mary and Sam.}
*What is the best choice for Sam if he is sure that Mary will cooperate?
*If Mary thinks Sam will cheat, what should Mary do and why?
*What is the prisoner's dilemma result?
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Mary
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A
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B
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A
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($100, $100)
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($200, $0)
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Sam
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B
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($0, $200)
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($150, $150)
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Note: A = Work independently; B = Cooperate and Lower Output. Each table entry lists Sam's earnings first, and Mary's earnings second.