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CHAPTER 15
1.1 Mariano’s Hacienda Ranch is monopolistically competitive. The restaurant industry contains a
2.1 Bands are an example of monopolistic competition. Firms are small and have some but not much
2.2 The key is the availability of substitutes. A monopoly is a firm producing a product for which
there is no close substitute. When they were just another band, clubs could hire a cheap band and
2.3 Vertical differentiation refers to product differentiation that makes a product better than rival
2.4 No. Remember the higher price of the brands like Sobe and Honest Tea tell us that at least for
2.5 Answers will vary, but the positive effects would include things such as potential cost savings
2.6 (a) There are diminishing returns from advertising. Going from $2.5 million to $3.5 million
increases sales by 4 million units or $48 million. But going from $3.5 million to $4.5 million
(b) Look at the benefits from increasing advertising in terms of sales and income versus the
303
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Solutions to Problems 304
2.7 Answers will vary.
2.8 Because tastes differ in different parts of the country, McDonald’s is trying to capitalize on this by
3.1 (a) This market has the earmarks of a monopolistically competitive one. The products of the
(b) A key issue is whether we are in long-run equilibrium. Do we expect more entry into this
market? Here we need to look at the costs to see the relationship between price and average
costs. Costs are as follows:
Notice that the average costs are above the price of $10 per dozen. This suggests that we are
not in long-run equilibrium and we would expect exit to occur. (Yolanda might also choose to
shrink the size of her business, but we don’t know enough about the shape of her average cost
(c) If the food truck could be used for weekend business, Yolanda should figure out the
opportunity cost of her food truck. To do this, she would have to know the profit (or loss) she
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Units of output
0
MR
Demand
15 20
20
15
14
13
10
6
Total revenue (black lines)
Total cost (dashed lines)
(gray lines)
Solutions to Problems 305
3.2 (a)
i. The profit-maximizing output level is 15 units.
(b) Firms will exit, shifting the demand facing the remaining firms to the right. The demand
3.3 For a purely competitive firm, price is equal to marginal revenue because the firm can sell as
4.1 (a) Disagree. There are no barriers to entry in monopolistic competition, and economic profits
(b) Disagree. Price does not equal marginal cost in the short or long run in monopolistically
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