Firms under perfect competition zero profit

Exam #3 Econ 112 SS16

1. Why do firms under perfect competition receive zero profit in the long run? (5 pts)

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2. In the perfectly competitive firm’s graph below, do the following:

a. Draw a MR=P line that generates short run profit for the firm (5 pts)

b. Label the profit-maximizing quantity (5 pts)

c. Show the area of profit (5 pts)

d. Label the break-even price (5 pts)

e. Label the shut-down price (5 pts)

3. Why do monopolies exist? (5 pts)

4. Using the monopolists graph below, do the following (*assume FC = $0):

a. Show the profit maximizing quantity (5 pts)

b. Show the profit maximizing price (5 pts)

c. Show monopoly profit and indicate negative, positive, or zero (5 pts)

5. Will the monopolist continue to receive economic profit in the long run? Explain. (5 pts)

6. Using the one-time-game payoff matrix below, do the following:

a. Determine Yellow’s dominant strategy (5 pts)

b. Determine White’s dominant strategy (5 pts)

c. Determine the Nash Equilibrium (5 pts)

d. If the game were to be repeated 10 times, would self-interested firms make the same decision as in a one-time-game? Explain. (5 pts)

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