Unit 5 homework
1) Explain
how economies of scale can be a barrier to entry.
2) Identify
the other two barriers to entry and explain how they block new firms from this
market.
3) Suppose
that a certain manufacturer has a monopoly on the sorority and fraternity ring
business (a constant-cost industry) because it has persuaded the “Greeks” to
give it exclusive rights to their insignia.
a.
Using demand and cost curves, draw a diagram
depicting the firm’s profit maximizing price and output level.
b.
Why is marginal revenue less than price for this
firm?
c.
On your diagram, show the deadweight loss that
occurs because the output level is determined by a monopoly rather than by a
competitive market.
d.
What would happen to price and output if the
Greeks decided to charge the manufacturer a royalty fee of $3 per ring?
4) List
three conditions that must be met for a monopolist to price discriminate
successfully
5) Why
is the perfectly discriminating monopolist’s marginal revenue curve identical
to the demand curve it faces?
6) A
monopolistically competitive firm faces the following demand and cost structure
in the short run:
|
Output |
Price (MR) |
FC |
VC |
TC |
TR |
Profit/Loss |
MC |
AVC |
|
0 |
$100 |
$100 |
$0 |
$100 |
$0 |
-$100 |
||
|
1 |
$90 |
$100 |
$50 |
$150 |
$90 |
-$60 |
$50 |
$50 |
|
2 |
$80 |
$100 |
$90 |
$190 |
$160 |
-$30 |
$40 |
$45 |
|
3 |
$70 |
$100 |
$150 |
$250 |
$210 |
-$50 |
$60 |
$50 |
|
4 |
$60 |
$100 |
$230 |
$330 |
$240 |
-$90 |
$80 |
$57.50 |
|
5 |
$100 |
$330 |
$430 |
$250 |
-$180 |
$100 |
||
|
6 |
$100 |
$450 |
$550 |
$240 |
-$310 |
$120 |
||
|
7 |
$100 |
$590 |
$690 |
$210 |
-$480 |
$140 |
a. Complete
the table.
b. What
is the highest profit or lowest loss available to this firm?
c. Should
this firm operate or shut down in the short run? Why?
d. What
is the relationship between marginal revenue and marginal cost as the firm
increases output?
7)
Illustrated below are the marginal cost and
average total cost curves for a small firm that is in long-run equilibrium
.png” alt=”Diagram 1″>
a. Locate
the long run equilibrium price and quantity if the firm is perfectly
competitive
b. Label
the price and quantity p1 and q1
c. Draw
in a demand and marginal revenue curve to illustrate long-run equilibrium if
the firm is monopolistically competitive.
Label the price and quantity p2 and q2.
d. How
do the monopolistically competitive firm’s price and output compare to those of
the perfectly competitive firm?
e. How
do long-run profits compare for the two types of firms?
8)
Why
is a firm in monopolistic competition said to be competitive? In what sense is that firm monopolistic?
9)
Why
might a price-leadership model of oligopoly not be an effective means of collusion
in an oligopoly?
10)
Why
would each of the following induce some members of OPEC to cheat on their
cartel agreement?
a.
Newly
joined cartel members are less developed countries
b.
The
number of cartel members doubles from 12 to 24
c.
International
debts of some members grow.
d.
Expectations
grow that some members will cheat
11)
Use
revenue and cost curves to illustrate and explain the sense in which a cartel
behaves like a monopolist.
.png”>
.png”>
.png”> MC
|
.png”>
.png”> p
12)
.png”>
c D
MR
0
|
.png”> Q
12)
Suppose
there are only two automobile companies, Ford and Chevrolet. Ford believes that Chevrolet will match any
price it sets, but Chevrolet too is interested in maximizing profit. Use the following price and profit data to
answer the following questions.
|
Ford’s selling price |
Chevrolet’s selling price |
Ford’s profits (Millions) |
Chevrolet’s profits (Millions) |
|
$4000 |
$4000 |
$8 |
$8 |
|
$4000 |
$8000 |
$12 |
$6 |
|
$4000 |
$12000 |
$14 |
$2 |
|
$8000 |
$4000 |
$6 |
$12 |
|
$8000 |
$8000 |
$10 |
$10 |
|
$8000 |
$12000 |
$12 |
$6 |
|
$12000 |
$4000 |
$2 |
$14 |
|
$12000 |
$8000 |
$6 |
$12 |
|
$12000 |
$12000 |
$7 |
$7 |
|
Profit = Millions |
||||
|
Ford |
$4,000 |
Profit $8 |
Profit $12 |
Profit $14 |
|
$8,000 |
Profit $6 & |
Profit $10 & $10 |
Profit $12 & $6 |
|
|
$12,000 |
Profit $2 & |
Profit $6 & $12 |
Profit $7 & $7 |
a.
What
price will Ford charge?
b.
What
price will Chevrolet charge once Ford has set its price?
c.
What
is Ford’s profit after Chevrolet’s response?
d.
If
the two firms collaborated to maximize joint profits, what price would they
set?
e.
Given
your answer to part (d), how could undetected cheating on price cause the
cheating firm’s profit to rise?
13)
While
grading a final exam, an economics professor discovers that two students have
virtually identical answers. She is
convinced the two cheated but cannot prove it.
The professor speaks with each student separately and offers the following
deal: Sign a statement admitting to
cheating. If both students sign the
statement, each will receive an “F” for the course. If only one signs, he is allowed to withdraw
from the course while the other student is expelled. If neither signs both receive a “C” because
the professor does not have sufficient evidence to prove cheating.
.png”>
.png”>
.png”>
.png”>
.png”>
.png”>
.png”>
.png”>
.png” alt=”Text box: withdraw”>
.png” alt=”Text box: sign”>
.png” alt=”Text box: withdraw”>
.png” alt=”Text box: student 1″>
.png” alt=”Text box: c”>
.png” alt=”Text box: c”>
.png” alt=”Text box: expelled”>
.png” alt=”Text box: expelled”>
.png” alt=”Text box: f”>
.png” alt=”Text box: f”> FF
14)
a.
Draw
a payoff matrix
a. Draw a payoff matrix
b.
Which
outcome do you expect? Why?
15)
Why
is firm behavior under oligopoly so difficult to predict?
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