1. Paulo's Pizzas is a small pizzeria located in a busy city street frequented by people anxious to buy a lunch-time snack from one of many snack bars and bistros. The food sold in the street is quite varied both in terms of its type (e.g. noodle bars, hamburger joints, sushi bars etc) and ambience (e.g. take-away, table service etc) but it costs from $10 to $20 per serve. Paulo even has some direct competition from non-specialist Pizza suppliers but they serve pizzas as part of a wider, more general menu. Paulo (and his brother Enzo) boast of original recipes and claim Italian authenticity for their pizzas.

(a) What kind of competitive market does Paulo's Pizzas operate in? Explain your choice.

Graph 1 below shows the 'share of market' demand curve available to Paulo's Pizzas and his business' ATC and MC curves.

(b) Based on the information in Graphl above, answer the following questions:

How many pizzas does Paulo's produce to maximize profits?

What is the profit maximizing price?

What is the cost per pizza at the profit maximizing level of production

What are total profits at the profit-maximising level of production?

(c) Graph 2 above shows the change in market conditions that result from new entrants into the lunch-time snack' market (which we can assume is not growing). AR2 and MR2 now represent the new share-of-market demand and MR curves faced by Paulo's Pizzas. In the space below describe the new conditions prevailing in the market and discuss the new outcomes suggested by Graph 2. Does the graph suggest that Paulo should expand his business or close down?

2. 'The demand curve facing the monopolistically competitive finn lies somewhere between the one facing a monopolist and the one facing a perfectly competitive firm. This is explained by differences in the nature of competition and barriers to entry. It also results in differences in the degrees of allocative and productive efficiency for each market form.' Discuss this statement

3. The likelihood of a cartel being successful is greater when

a. cost and demand curves of various participants are very similar.

b. firms are producing a differentiated, rather than a homogeneous, product.

c. the number of firms involved is relatively large.

d. the economy is in the recession phase of the business cycle.

4. TRUE or FALSE? 'If the prisoner's dilemma is played once only, the dominant strategy equilibrium is both prisoners confessing to the robbery.'

LIVING CASE STUDY

1. Discuss and illustrate the likely short run impact of a price rise in cotton on CCC, a monopolistically competitive firm that is currently operating at long run equilibrium. What will happen in the long run?

2. Coglin Clothing is a small firm making all sorts of jeans. The market for jeans is monopolistically competitive. Coglin Clothing has been running at a loss, but is minimizing its loss by continuing to operate.

a. Illustrate Coglin Clothing's situation in a diagram.

b. Illustrate Coglin Clothing's situation in long run equilibrium.

3. If Coglin Clothing operates in an oligopoly market structure, explain the 4 different price-output models it could use.

Please explain the answer to the following true or false questions.

1. The demand curve facing a monopolistically competitive firm is highly elastic. This means that P = AR = MR for that firm.

2. Monopolistically competitive firms will earn an economic profit in the long run.

3. Monopolistically competitive firms that are operating under long run equilibrium will achieve both allocative and productive efficiency.

4. In monopolistic competition firms produce differentiated products and have no control over price.

5. Oligopoly is a large number of small firms producing either differentiated or identical products.

6. Collusion effectively turns an oligopolist into a monopoly. The gain in market power is enough to keep the collusive agreement from breaking down.

7. In graph above, a profit maximizing oligopolist will charge a price equals to OE.

8. If the oligopolist in the diagram above is faced with a higher rent, this will cause MC to shift upwards as well.

9. This oligopolist is achieving productive efficiency because it is operating at point J which is the minimum point of ATC.

10. In the graph above, OE would be the allocatively efficient price.