Week Six Assignment

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Macomb Community College *

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1090

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Economics

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Feb 20, 2024

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docx

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Uploaded by MasterNeutron12392

1. (1) Low Barriers to Entry: Although there is a cost to entering this type of market, there are relatively few barriers, such as cooperative or union dues. (2) Imperfect Information: In a monopolistic competition, asymmetric information from buyer to buyer, seller to seller, and vice versa is common. (3) Many buyers and sellers: The market has many buyers and vendors, much like the ideal competitive market. In other words, in this type of market, neither a single supplier monopoly nor a single buyer monopoly exist. 2. Herfindahl-Hirschman Index: The HHI is a measure of market concentration that considers the relative size distribution of firms in a market. It is calculated by squaring the market share of each firm competing in the market and then summing those numbers. The HHI, for instance, is 2,600 for a market with four firms and shares of 30, 20, and 20% (30 2 + 30 2 + 20 2 + 20 2 = 2,600). It takes into account the market's relative firm size distribution. It decreases to zero when a market is dominated by many enterprises all with the same maximum size and increases to a maximum of 10,000 points when one firm dominates the market. Groupon: an online coupon company. It provides time-limited deals that require a minimum number of buyers. It had 30 American operating cities, 120 staff members, 2 million subscribers, and $33 million in revenue in 2009. By the end of 2010, it had 4,000 employees, 51 million members, and $760 million revenue while operating in 565 cities throughout the world. With a market share of more than 60% in the US in 2011, the company's first quarter 2011 revenue of $645 million was almost as high as the total revenue for 2010. McDonald’s: A company that invests heavily in maintaining its brand name to differentiate itself from other companies. McDonald's invests money in protecting its brand identity, which sets it apart from competing businesses. The sum of money used to establish and keep a brand name does not indicate anything unique about the items offered by McDonald's. Less than 1% of the company's shares increased in morning trading. The stock, which has a $135 billion market value, has lost 11% of its value so far in 2020. According to the corporation, first-quarter sales at its global name stores decreased by 3.4%. Burger King: Another fast-food chain restaurant that is weakly differentiated from McDonald's but offers similar satisfaction to customers. Burger King has moved its focus from current franchises, to seeking new franchisees. The company is focusing on strengthening their marketing, product pipeline, cooking platform, and emphasis on service and friendliness. The company’s percentage is at 2.5%, but declining because they are losing revenue. 3. In the short run, monopolistically competitive firms aim to maximize profit or minimize loss by producing the level of output where marginal revenue equals marginal cost. This is similar to the strategy used by both pure competitors and monopolists. To illustrate this, we can refer to Figure 13.1a in the textbook. In this figure, a competitive firm produces an output where MR (marginal revenue) is equal to MC (marginal cost). The demand curve D1 shows that the firm charges a price of P1 for this level of output. However, in order to produce this output as determined by demand curve D2, the firm must charge a price of p

squared. If p squared is less than average total cost, then the firm incurs a per unit loss represented by A squared - p squared and a total loss represented by the red area on the graph. In contrast, in the long run for monopolistically competitive firms, only normal profits are earned. If there is a short-run profit due to favorable market conditions or other factors attracting new rivals into the industry because entry is easy. As new firms enter and compete with existing ones, each firm's share of total demand decreases and they face more close-substitute products. This causes a shift in their demand curve to the left (represented as d cubed in Figure 13.1c). The long-run equilibrium output for a typical firm becomes q cubed on this shifted demand curve. Any greater or lesser output will result in an average total cost that exceeds product price p cubed, leading to losses for the firm. Therefore, when an industry experiences short-run losses like those shown earlier with A squared - p squared as costs exceed revenues), some firms may exit or leave that industry in search of better opportunities or profitability in other markets during long run equilibrium conditions. 4. In monopolistic competition, a firm is neither productive nor allocatively efficient in the long- run equilibrium.Productive efficiency refers to producing goods at the lowest possible cost. However, in monopolistic competition, firms produce where their average total cost (ATC) exceeds the minimum average total cost (ATCmin). This means that they are not producing at the most efficient level and could potentially reduce costs by adjusting their production methods. Allocative efficiency refers to producing goods at a quantity where marginal cost (MC) equals price (P). In monopolistic competition, firms set their prices higher than their marginal costs. This results in an under allocation of resources because consumers are willing to pay more for the product than it actually costs to produce. As a result, there is an inefficiency in resource allocation.These inefficiencies lead to excess production capacity at every firm in the industry and create an efficiency loss. The monopolistically competitive firm produces only q cubed units, which is less than what would be produced if it were operating efficiently. The size of this efficiency loss can be represented graphically as area acd. Due to these inefficiencies, monopolistically competitive firms are not able to achieve productive or allocative efficiency in the long-run equilibrium. 5. The firm is making a profit because they are willing to negotiate with customers and increase the amount of meals they serve during certain hours at the restaurant. This strategy is attracting more customers and increasing their revenue.By doing this, the firm is creating barriers for other firms to enter the market. These barriers come from the need to develop and advertise a product that is different from what their rivals offer. This makes it difficult for other firms to imitate them, as it would be costly for them to do so. As a result of these actions, the demand curve for the firm's product will shift to the left. This means that there will be a decrease in demand for their product compared to before.When new firms enter the market and reduce demand to such an extent that the demand curve becomes tangent (touches) with the average total cost (ATC) curve at its profit-maximizing output level,

then the firm is making a normal profit. In other words, they are covering all their costs and earning just enough profit to stay in business. 6. (1) Control over price but mutual interdependence: In an oligopolistic market, each firm has the ability to set its own price and output levels, similar to a monopolist. However, unlike a monopolist, an oligopolist must consider the reactions of its rivals when making pricing decisions. This is because the actions of one firm can have significant effects on the other firms in the industry. Therefore, there is mutual interdependence among these firms as they strategically plan their pricing, product characteristics, advertising, and other strategies to maximize their profits. (2) Entry barriers: Oligopolies often have high barriers to entry that prevent new competitors from entering the market easily. These barriers can be similar to those found in pure monopoly situations. One common barrier is economies of scale - where larger firms enjoy cost advantages due to their size and production capabilities. For example, in industries like aircraft manufacturing or copper mining, existing firms may already have achieved economies of scale that new entrants would find difficult to match with their smaller market share. (3) Mergers: Some oligopolies emerge through mergers or acquisitions between competing firms in an industry. When two or more companies merge or combine forces, they increase their market share significantly and gain greater control over supply within the industry. This increased control allows them to influence prices more effectively and potentially achieve greater economies of scale due to increased production capacity and purchasing power for inputs. 7. Dominant Firms: The degree to which one or two firms dominate an industry is not shown by the four-firm concentration ratio. Both of these industries have a 100% concentration ratio. While industry Y is an oligopoly that might be undergoing intense economic competition, industry X is a full monopoly. Economists concur that monopolistic power in industry X is far larger than in industry Y, despite the fact that both industries have similar 100% concentration ratios. In a second business, Y firms compete for a market share of 25% each. World Trade: Because import competition from overseas suppliers is not taken into account, the data in Table 14.1 may overestimate concentration because they solely consider output produced in the United States. Despite the fact that table 14.1 indicates that four American companies create 73% of the domestic tire output, it ignores the reality that a sizable majority of the truck and auto tires purchased in the United States are imports. Many of the largest foreign firms in the world conduct business in the United States. Interindustry Competition: Concentration ratios are based on various industry definitions. In this instance, they cover up strong interindustry competition between two items linked to various industries. Because aluminum competes with copper in many applications, the high concentration ratio for the main aluminum industry understates competitiveness in that sector. Localized Markets: While concentration ratios apply to the entire country, some product markets are quite localized due to high transit costs. Despite low national concentration ratios, they can nonetheless persist. The percentage of household refrigerators and freezers is 93%.

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