Chapter 10 Solutions to Monopolistic Competition

2100 Words Feb 14th, 2012 9 Pages
Chapter 10

Prices, Output, and Strategy: Pure and Monopolistic Competition
Solutions to Exercises
1. Pepsi and Coca-Cola bottlers face enormous supplier power from the syrup manufacturers, sell primarily to concentrated grocery store chains, and are constantly presented with many substitute firms who could provide their role in the value chain. Thus, despite high barriers to entry from high capital requirements, high switching costs, and closed distribution channels, their sustainable profitability is lower than Coca-Cola and Pepsi. The latter face almost no supplier power, few close substitutes as perceived by loyal customers, very high barriers to effective entry, low intensity of rivalry from concentrated markets, non-price
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100
8. a.

Chapter 10/Prices, Output, and Strategy: Pure and Monopolistic Competition
TC = 1/3 Q3 − 15Q2 + 5Q + 24,000 MC = Q2 − 30Q + 5 P = 1760 − 12Q TR = 1760Q − 12Q2 MR = 1760 − 24Q MC = MR Q2 − 30Q + 5 = 1760 − 24Q Q2 − 6Q − 1755 = 0 (Q − 45)(Q + 39) = 0 Q* = 45 units P* = 1760 − 12(45) = $1220 π = TR − TC π = 1220(45) − [(1/3)(45)3 − 15(45)2 + 5(45) + 24,000] π* = $30,675 P = 1760 − 12Q Q = 1760/12 − P/12 dQ/dP = −1/12 ED = −1/12(1220/45) = −2.26 $24,000

b. c.

d.

e.

f. Price and output remain the same, but profit declines by $5,000. 9. a. TC = 6000 + 400Q − 20 Q2 + Q3 VC = 400Q − 20Q2 + Q3 AVC = 400 − 20Q + Q2 dAVC/dQ = −20 + 2Q = 0 Q = 10 When Q = 10, AVC is minimized and equals: AVC = 400 − 20(10) + (10)2 = $300

No, the price of $250 is below the AVC. The firm should not produce in the short run. b. At a price of $300, the firm just covers its variable costs and incurs losses equal to its fixed costs, or $6,000. At a price of $300, the firm is indifferent with respect to the decision to produce in the short run.

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