However, the challenge for the parties is to find ways to encourage cooperative behavior.

Self-Check Questions

1. Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an

increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

2. Continuing with the scenario in question 1, in the long run, the positive economic profits that the

monopolistic competitor earns will attract a response either from existing firms in the industry or firms

outside. As those firms capture the original firm’s profit, what will happen to the original firm’s profit-

maximizing price and output levels?

3. Consider the curve in the figure below, which shows the market demand, marginal cost, and marginal

revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed

costs.

FIGURE 10.6
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