Exercise 11.

1
The common feature in monopoly, oligopoly,
and monopolistic competition is

A)
the absence of close substitutes.

B)
blocked entry.

C)
interdependent decision making by
firms.

D)
price discrimination.

E)
downward sloping demand.

Answers to Exercise 11.1

The correct answer is (e).
In monopoly, monopolistic competition
and oligopoly, firms have at least some
market power and can set price over a
range of output.
Thus the demand curve is downward
sloping.

Exercise 11.2
Firm B
Firm A

High Price

Low Price

High Price

$100 for A
$75 for B

$200 for A
$50 for B

Low Price

$50 for A
$400 for B

$150 for A
$300 for B

Refer to the table above which shows the payoff matrix

of two firms, Firm A and Firm B, each has two
strategies, to set high price or low price. The figures in
the matrix show the profits earned by each firm.
(a) Solve for the Nash equilibrium in this game.
(b) Is this game a prisoners dilemma game? Justify
3
your answers.

Answers to Exercise 11.2

(a) The Nash equilibrium is both firm set
high price and that the payoff to Firm A is
$100 and pay off to Firm B is $75.
(b) This is a prisoners dilemma game. The
reason is that the Nash equilibrium is not
the best outcome. The best outcome is in
fact both firms set low price so that Firm A
gets $150 and Firm B gets $300
4

Exercise 11.3

The table below show the payoff matrix for

players A and B to strategies X and Z.
P la y e r B

P la y e r A

X
Z

$ 7 0 0 fo r B $ 3 0 0 fo r A
$ 4 0 0 fo r B $ 5 0 0 fo r A

$ 3 0 0 fo r B $ 2 0 0 fo r A
$ 6 0 0 fo r B $ 1 ,0 0 0 fo r A

Player A finds that

A)
strategy Z is a dominated strategy.

B)
strategy X is a dominant strategy.

C)
strategy Z is a dominant strategy.

D)
he has no dominant strategy.

E)
his best strategy depends on what
player B chooses.

Answers to Exercise 11.3

The correct answer is (c)
If Player B chooses X, Player A will choose
Z since $500 is better than $300.
If Player B chooses Z, Player A will choose
Z since $1000 is better than $200.
Thus strategy Z is a dominant strategy for
Player A.

Exercise 11.4
(1) Why is there no incentive for a firm
in the kinked demand curve model to
change its price?
(2) Is the price always remain rigid in
the kinked demand curve model?

Answers to Exercise 11.4

(1) In the kinked demand curve model, the
price is stabilized at the kink level. If the
firm charge a higher price, its demand
becomes elastic and its revenue drops. If it
charges a lower price, its demand becomes
inelastic and its revenue drops. Thus it has
no incentive to change the price.
If there is a large change in the marginal
cost such that the MC shifts by a larger
amount than can be accommodated by the
gap of MR, then the equilibrium price will
change.
8

Kinked Demand Curve Model

No change in price for
MC1 to MC3

Price
MC5

Price drops for MC4

Price rises for MC5

MC3

P1

MC1
MC2
MC4

MR
Q1

D
Quantity