Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

FINAL EXAMINATION 349
however, may lead to more research and development and therefore to faster technological progress and rising
standard of living in the long run.
(b) While the perfectly competitive firm produces at the lowest point on its LAC curve when the industry is in
long-run equilibrium, the monopolist and the oligopolist are very unlikely to do so, and the monopolistic competitor
never does so when the industry is in long-run equilibrium. However, the size of efficient operation is
often so large in relation to the market as to leave only a few firms in the industry. Perfect competition under
such circumstances would either be impossible or lead to prohibitive costs.
(c) While the perfectly competitive firm, when in long-run equilibrium, produces where P ¼ LMC, for the imperfectly
competitive firm P . LMC and so there is an underallocation of resources to the firms in imperfectly
competitive industries and a misallocation of resources in the economy. That is, under all forms of imperfect
competition, the firm is likely to produce less and charge a higher price than under perfect competition. This
difference is greater under pure monopoly and oligopoly than under monopolistic competition because of the
greater elasticity of demand in monopolistic competition.
(d ) Finally, waste resulting from excessive sales promotion is likely to be zero in perfect competition and greatest
in oligopoly and monopolistic competition.
4. (a) The optimal and dominant strategy for firm A is A1. The reason for that is that the payoff for strategy A1 is
greater than the payoff of strategy A2 (i.e., the values in row 1 are all larger than the corresponding values in
row 2 of the payoff matrix).
(b) Given that firm A chooses strategy A1, firm B will chose strategy B2 because this minimizes firm A’s gain,
which is firm B’s loss. Thus, each firm remains with the same market share that it had before. To be noted is
that games, such as the above, where the gain of one firm represents the loss of the other firm (i.e., it comes at
the expense of the other firm), are called zero-sum games.
5. (a) A profit-maximizing firm will employ an input as long as it adds more to total revenue than it adds to total
cost. If L is the only variable input for the firm, the marginal revenue product of the additional unit of L hired
(i.e., the MRP L ) is equal to the extra output of the additional unit of L hired (i.e., MP L ) times the marginal
revenue of the firm (i.e., MR x ). That is, MRP L ¼ MP L
. MR x . As more units of L are hired, the MP L , and
thus the MRP L , eventually declines. The declining portion of the MRP L schedule is the firm’s demand schedule
for L when L is the only variable input of the firm.
(b) When L is only one of several variable inputs, the MRP L curve no longer represents the firms demand curve
for L. The reason for this is that, given the price of the other variable inputs, a change in the price of L will
bring about changes in the quantity used of these other variable factors. These changes (called internal effects)
in turn cause the entire MRP L curve of the firm to shift to the right. The quantities of L demanded by the firm at
different prices of L will then be given by points on different MRP L curves. Thus, at P L ¼ OA in Fig. F-3, the
firm demands OC of L.AtP w ¼ OF, the firm demands OJ. Joining point B on MRP L, with points such as H on
MRP L , we get d L , the firm’s demand curve for L
Fig. F-3