Question

Short-answer Questions and Problems: Be thorough, clear, and show your work.

1.) In a perfectly competitive market, price is equal to marginal cost in the long run. Explain why this is not true for a monopolist or for firms in a monopolistically competitive market.

2.) Suppose Pizza Hut raises its price by 8%, and as a result, the demand for Little Caesar’s pizza goes up by 4%.

a.) What is the cross-price elasticity of demand for Pizza Hut and Little Caesar’s?

b.) Does your answer to part a indicate that these products substitutes or complements? Explain.

c.) What could Pizza Hut do to make it more likely that that they would increase their total revenue even after this price increase? (Draw only upon the material in chapters 11 and 12 for your answer.)

3.) Briefly explain one idea from microeconomics (a concept, a claim, a model, …) that you did not know before taking this course and that you found interesting or useful. Briefly explain the idea and briefly explain why you find it interesting or useful.

4.) Give an example of a Prisoner’s Dilemma situation. Clearly explain the situation, including the strategies available, the dominant strategy for each side, and the Nash equilibrium (i.e., the outcome that is most likely). Clearly explain why that outcome is most likely. Use a matrix to present your example very clearly (feel free to draw this matrix using Word or attach a picture drawn by hand). Offer two suggestions on how the participants could get out of this situation to their mutual benefit—i.e., how they could end up in the result that benefits both.

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Answer 1