MANAGERIAL/ECON+BUS/STR CONNECT ACCESS
9th Edition
ISBN: 2810022149537
Author: Baye
Publisher: MCG
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Chapter 11, Problem 19PAA
To determine
The profits earn by the firm under the low price guarantee pricing strategy and alternative strategy firm can use to earn positive profits are to be explained.
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Many home improvement retailers like Home Depot and Lowe’s have low-price guarantee policies. At a minimum, these guarantees promise to match a rival’s price, and some promise to beat the lowest advertised price by a given percentage. Do these types of pricing strategies result in cutthroat Bertrand competition and zero economic profits? If not, why not? If so, suggest an alternative pricing strategy that will permit these firms to earn positive economic profits.
Many home improvement retailers like Home Depot and Lowes have low-price guarantee policies. At a minimum, these guarantees promise to match a rival’s price, and some promise to beat the lowest advertised price by a given percentage.Do these types of pricing strategies result in cutthroat Bertrand competition and zero economic profits? If not, why not? If so, suggest an alternative pricing strategy that will permit these firms to earn positive economic profits.
Due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. 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?
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- The laptop industry is monopolistically competitive. Each firm's total cost function is given by TC = 80,000 + 10Q, where Q is the firm's output. Each firm's demand function is given by Q = S((1/n) - (1/800)(P-V)), where S is industry output, n number of firms, P price of this firm, and V average price of competing firms. (Hint: each firm's marginal revenue function is MR = P - (800Q/S).) Note: show the key steps in your work. a. Home's market size is 4,900. Find the equilibrium in the Home market: what will be each firm's output, price, and number of firms? b. Foreign's market size is 57,600. Find the equilibrium in the Foreign market: what will be each firm's output, price, and number of firms? c. Suppose Home and Foreign integrate their laptop markets. Find the equilibrium in the integrated market: what will be each firm's output, price, and number of firms? d. Intuitively, why does market integration allow both countries to be better off?arrow_forwardBecause this market is a monopolistically competitive market, you can tell that it is in long-run equilibrium by the fact that P = ATC at the optimal quantity for each firm. Furthermore, the quantity the firm produces in long-run equilibrium is greater than the efficient scale. True or False: This indicates that there is excess capacity in the market True False engines. Monopolistic competition may also be socially inefficient because there are too many or too few firms in the market. The presence of the externality implies that there is too much entry of new firms in the market.arrow_forwardBecause of substantial barriers to entry, monopolistically competitive firms can easily earn long run economic profits. is this true or falsearrow_forward
- Although the long run equilibrium of a monopolistically competitive markets involves zero economic profit likeperfect competition, the outcome is deemed to be inefficient. Why is that the case? Are there desirablecharacteristics of monopolistic competition that potentially balance some of the inefficiencies?arrow_forwardConsider a monopolistically competitive market in long-run equilibrium, and a firm that is in the market. Suppose there is a shortage of a key input, so that every firm's ATC curve shifts up by a fixed amount. If the firm remains in the market in the new long-run equilibrium, what happens to the price at which it sells the good, and what quantity does it sell? Price goes down, quantity stays the same Price goes up, quantity stays the same Price goes down, quantity goes down Price goes up, quantity goes downarrow_forwardSuppose a company creates its own differentiated type of sneaker and is thus considered a monopolistically competitive firm. This firm has a constant marginal cost curve. For each unit of output that the monopolistically competitive firm produces, it costs an additional $50$50. The firm's marginal revenue curve is MR=80−6QMR=80−6Q, where Q is the quantity produced. The firm's perceived demand curve is P=80−3QP=80−3Q. What is the monopolistically competitive firm's profit-maximizing output and price? Write the exact answer. Do not round.arrow_forward
- Microsoft is the market leader in office software with its MSOffice. Its marginal cost of production c is 1 dollar per unit. Home users demand 40 million licenses and are willing to pay 50 dollars, whereas businesses demand 60 million licenses and are willing to pay 100 dollars. Microsoft also produces a home version of MS Office at a marginal cost of c'=2. Home users and businesses are willing to pay 60 and 40 dollars, respectively, for the home version. Which is the best pricing strategy for Microsoft? O Selling MSOffice Professional at 100 Selling MSOffice Home at 40 Selling MSOffice Professional units at 100 and MSOffice Home units at 40 Selling MSOffice Professional at 80 dollars and MSOffice Home at 40 dollarsarrow_forwardAn industry said to be characterized by monopolistic competition is the apparel industry. Suppose you were hired as a consultant by a firm in this industry. How would you advise the firm as to the levels of output, price, input usage, and advertising? What problems might the firm encounter?arrow_forwardThe diagram above shows a monopolistically competitive firm in the long run. Answer the questions below. If the firm is currently producing and selling Q1 units, what is the price being charged? Using the points displayed on the diagram, name the rectangular area that represents the total fixed cost of production. Using the points displayed on the diagram, name the rectangular area that represents the total variable cost of production. ) Using the points displayed on the diagram, name the rectangular area that represents the profit or loss. What should the firm do regarding price and/or quantity to minimize its losses?arrow_forward
- In long run equilibrium, economic profits tend to zero in a perfectly competitive market and also in a monopolistically competitive market. This is true because both market structures share a crucial characteristic. What is the characteristic that causes economic profits to get pushed towards zero in both perfect competition and monopolistic competition?arrow_forwardSuppose a monopolistically competitive firm is in long-run equilibrium. The firm's demand curve is tangent to its average cost curve at Q = 25. Average cost is minimized at Q = 35, where average cost is $50. Which of the following is true? Group of answer choices This firm maximizes profit at an output level of 35 units. This firm maximizes profit at an output level lower than 25 units. This firm maximizes profit at an output level of 25 units. This firm incurs an economic loss in the long run. This firm maximizes profit at an output level greater than 35 units.arrow_forwardSuppose that a firm produces polo shirts in a monopolistically competitive market. The following graph shows its demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Place a black point (plus symbol) on the graph to indicate the long-run monopolistically competitive equilibrium price and quantity for this firm. Next, place a grey point (star symbol) to unification the minimum average total cost the firm faces and the quantity associated with that cost. Because this market is a monopolistically competitive market, you can tell that it is in long-run equilibrium by the fact that ___ at the optimal quantity for each firm. Furthermore, the quantity the firm produces in long-run equilibrium ___ the efficient scale. True or False: This indicates that there is excess capacity in the market for shirts. Monopolistic competition may also be socially inefficient because there are too many or too few firms in the market. The presence of the ___…arrow_forward
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