MICROECONOMICS
21st Edition
ISBN: 9781260229431
Author: McConnell
Publisher: MCG
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Chapter 13, Problem 4DQ
To determine
Use of non-price competition on price competition.
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1.Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit? (a) a supermarket in your hometown; (b) the steel industry; (c) a Kansas wheat farm; (d) the commercial bank in which you or your family has an account; (e) the automobile industry. In each case, justify your classification. LO1
6. The accompanying diagram shows the demand, marginal revenue, and marginal cost of a monopolist. (LO1, LO3, LO5)
a. Determine the profit-maximizing output and price.
b. What price and output would prevail if this firm’s product were sold by price-taking
firms in a perfectly competitive market?
c. Calculate the deadweight loss of this monopoly.
8. The elasticity of demand for a firm’s product is –2.5 and its advertising elasticity of demand is 0.2. (LO8)
a. Determine the firm’s optimal advertising-to-sales ratio.
b. If the firm’s revenues are $40,000, what is its profit-maximizing level of advertising?
4. You are the manager of a monopoly, and your demand and cost functions are given by P = 300 − 3Q and C(Q) = 1,500 + 2Q2, respectively. (LO3, LO4)
a. What price–quantity combination maximizes your firm’s profits?
b. Calculate the maximum profits.
c. Is demand elastic, inelastic, or unit elastic at the profit-maximizing price–quantity combination?
d. What price–quantity combination maximizes revenue?
e. Calculate the maximum revenues.
f. Is demand elastic, inelastic, or unit elastic at the revenue-maximizing price–quantity combination?
6. The accompanying diagram shows the demand, marginal revenue, and marginal cost of a monopolist. (LO1, LO3, LO5)
a. Determine the profit-maximizing output and price.
b. What price and output would prevail if this firm’s product were sold by price-taking
firms in a perfectly competitive market?
c. Calculate the deadweight loss of this monopoly.
8. The elasticity of demand for a firm’s product is –2.5 and its advertising elasticity of demand is 0.2.…
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- Which of statement is true about economic profit in the long run.(LO2,3). a) both the monopolistic and perfect competitor make one. b) neither the monopolistic nor the perfect competitor makes one. c) only the perfect competitor makes one. d) only the monopolistic makes one.arrow_forward14. Aside from advertising, how can monopolisticallycompetitive firms increase demand for their products? 17. Would you expect the kinked demand curve to bemore extreme (like a right angle) or less extreme (like anormal demand curve) if each firm in the cartel producesa near-identical product like OPEC and petroleum?What if each firm produces a somewhat differentproduct? Explain your reasoning.arrow_forwardUse the accompanying graph to answer the questions that follow. (LO1, LO2) a. Suppose this monopolist is unregulated. (1) What price will the firm charge to maximize its profits? (2) What is the level of consumer surplus at this price? b. Suppose the firm’s price is regulated at $80. (1) What is the firm’s marginal revenue if it produces 7 units? (2) If the firm is able to cover its variable costs at the regulated price, how much output will the firm produce in the short run to maximize its profits? (3) In the long run, how much output will this firm produce if the price remains regulated at $80?arrow_forward
- 9. Suppose Warner Music and Universal Music are in a duopoly and currently limit themselves to 10 new artists per year. One artist sells 2 million songs at $1.25 per song. However, each label is capable of signing 20 artists per year. If one label increases the number of artists to 20 and the other stays the same, the price per song drops to $0.75, and each artist sells 3 million songs. If both labels increase the number of artists to 20, the price per song drops to $0.30, and each artist sells 4 million songs. Explain how revenue payoffs for each scenario are calculated. If this game is played once, how many artists will each producer sign, and what will be the price of a song? If this game is played every year, how many artists will each producer sign, and what will be the price of a song?arrow_forward9. Firms 1 and 2 are proposing to merge. They offer symmetrically differentiated products and have identical costs and, therefore, identical premerger prices. (Note that “symmetrically differentiated products” means that if they charge the same price, then they have the same demand.) The common premerger price for firms 1 and 2 is $90, and the common marginal cost is $60. If firm 1 were to raise its price to $100, we know that its demand would drop by 20 units and firm 2’s demand would rise by 5 units. a. Assume the merger would reduce marginal cost by 10 percent. Using UPP, is there reason to be concerned with the merger? b. Suppose the prospective merger partners want to convince the DOJ that the merger will not raise price. Using UPP, how large must they argue the efficiency is? c. Suppose there are improved estimates of firms’ demand functions and now we know that if firm 1 were to raise its price to $100, its demand would (still) drop by 20 units, but firm 2’s demand would rise by…arrow_forwardMary competes in a monopolistically competitive market. Suddenly, 5 new firms enter the market, causing her perceived demand curve to shift. The following tables show her original and new demand curves and her cost information. Original Demand Curve Price Quantity TC 30 0 $130 25 10 $140 20 20 $260 15 30 $450 10 40 $660 New Demand Curve Price Quantity TC 25 0 $130 20 10 $140 15 20 $260 10 30 $450 5 40 $660 Assume that Mary can only choose from the quantities of output given in the table. By how much will the quantity that she produces change after the new firms enter the market? Question 4 options: increase by 5 decrease by 5 increase by 10 decrease by 10arrow_forward
- Reference: Ref 11-2 (Exhibit: Profit Maximization for a Firm in Monopolistic Competition) Suppose that an innovation reduces a firm's fixed costs and reduces cost from ATC to ATC'. Suppose further that after the innovation reduced the cost to ATC', it costs a total of $18 per unit to produce 170 units per day. If the firm charges a price equal to marginal cost, total net profit will be: a. $1,190. b. $3,400. c. $1,700. d. $3,060. Note:- Please avoid using ChatGPT and refrain from providing handwritten solutions; otherwise, I will definitely give a downvote. Also, be mindful of plagiarism. Answer completely and accurate answer. Rest assured, you will receive an upvote if the answer is accurate.arrow_forward14.6. Product positioning and price competition. Consider a duopoly where horizon- tal product differentiation is important. Firms first simultaneously choose their prod- uct locations, then simultaneously set prices in an infinite series of periods. Suppose that firms collude in prices in the second stage and anticipate they will do so at the product-positioning stage. In this context, what do you expect the degree of product differentiation to be?.arrow_forward11 21. Imagine an N firm oligopoly for "nominally differentiated" goods. That is, each of the N firms produces a product that "looks" different from the products of its competitors, but that "really" isn't any different. However, each firm is able to fool some of the buying public. Specifically, each of the N firms (which are identical and have zero marginal cost of production) has a captive market -consumers who will buy only from that firm. The demand generated by each of these captive markets is given by the demand function Pn A- Xn , where Xn is the amount supplied to this captive market and Pn is the price of the production of firm n. There is also a group of intelligent consumers who realize that the products are really undifferentiated. These…arrow_forward
- 2. Suppose that the market demand for mountain spring water is given as follows: P = 1,200 - QMountain spring water can be produced at no cost. a. What is the profit maximizing level of output and price of a monopolist? b. What level of output would be produced by each firm in a Cournot duopoly in the long run? What will the price be? c. What will be the level of output and price in the long run if this industry were perfectly competitive?arrow_forwardTwo firms with the same (constant) marginal costs are engaging in Bertrand competition. One of the companies exits the industry. As a aconsequence, the price for the other firm increases by 50%. What is the elasticity of demand in this market?O. 3O. 2O. 2.5O. 4arrow_forwardWhile there is a degree of differentiation between major grocery chains like Albertsons and Kroger, theregular offering of sale prices by both firms for many of their products provides evidence that these firmsengage in price competition. For markets where Albertsons and Kroger are the dominant grocers, thissuggests that these two stores simultaneously announce one of two prices for a given product: a regularprice or a sale price. Suppose that when one firm announces the sale price and the other announces theregular price for a particular product, the firm announcing the sale price attracts 1000 extra customers toearn a profit of $5000, compared to the $3000 earned by the firm announcing the regular price. Whenboth firms announced the sale price, the two firms split the market equally (each getting an extra 500customers) to earn profits of $2000 each. When both firms announced the regular price, each companyattracts only its 1500 loyal customers and the firms each earned $4500 in…arrow_forward
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