Question: What factors determine the amount of monopoly

> Why does price leadership sometimes evolve in oligopolistic markets? Explain how the price leader determines a profit-maximizing price.

> A monopolist is deciding how to allocate output between two geographically separated markets (East Coast and Midwest). Demand and marginal revenue for the two markets are: P 1 = 15 – Q1 MR 1 = 15 – 2Q1 P 2 = 25 – 2Q2 MR 2 = 25 – 4Q2 The monopo

> The kinked demand curve describes price rigidity. Explain how the model works. What are its limitations? Why does price rigidity occur in oligopolistic markets?

> Explain the meaning of a Nash equilibrium when firms are competing with respect to price. Why is the equilibrium stable? Why don’t the firms raise prices to the level that maximizes joint profits?

> What do the Cournot and Bertrand models have in common? What is different about the two models?

> In the Stackelberg model, the firm that sets output first has an advantage. Explain why.

> Two firms compete in selling identical widgets. They choose their output levels Q1 and Q2 simultaneously and face the demand curve P = 30 – Q where Q = Q1 + Q2. Until recently, both firms had zero marginal costs. Recent environmental regulations have in

> This exercise is a continuation of Exercise 3. We return to two firms with the same constant average and marginal cost, AC = MC = 5, facing the market demand curve Q1 + Q2 = 53 – P. Now we will use the Stackelberg model to analyze what will happen if one

> A monopolist can produce at a constant average (and marginal) cost of AC = MC = $5. It faces a market demand curve given by Q = 53 – P. a. Calculate the profit-maximizing price and quantity for this monopolist. Also calculate its profits. b. Suppose a s

> Consider two firms facing the demand curve P = 50 – 5Q, where Q = Q1 + Q2. The firms’ cost functions are C1(Q1) = 20 + 10Q1 and C2(Q2) = 10 + 12Q2. a. Suppose both firms have entered the industry. What is the joint profit-maximizing level of output? How

> Suppose all firms in a monopolistically competitive industry were merged into one large firm. Would that new firm produce as many different brands? Would it produce only a single brand? Explain.

> A lemon-growing cartel consists of four orchards. Their total cost functions are: TC is in hundreds of dollars, and Q is in cartons per month picked and shipped. a. Tabulate total, average, and marginal costs for each firm for output levels between 1 an

> Why might a firm have monopoly power even if it is not the only producer in the market?

> Suppose the market for tennis shoes has one dominant firm and five fringe firms. The market demand is Q = 400 – 2P. The dominant firm has a constant marginal cost of 20. The fringe firms each have a marginal cost of MC = 20 + 5q. a. Verify that the tota

> The dominant firm model can help us understand the behavior of some cartels. Let’s apply this model to the OPEC oil cartel. We will use isoelastic curves to describe world demand W and noncartel (competitive) supply S. Reasonable number

> Two firms compete by choosing price. Their demand functions are Q 1 = 20 – P1 + P2 and Q2 = 20 + P1 – P2 where P1 and P2 are the prices charged by each firm, respectively, and Q1 and Q2 are the resulting demands. Note that the demand for each g

> Two firms produce luxury sheepskin auto seat covers, Western Where (WW) and B.B.B. Sheep (BBBS). Each firm has a cost function given by C (q) = 30q + 1.5q2 The market demand for these seat covers is represented by the inverse demand equation P = 300 – 3

> Demand for light bulbs can be characterized by Q = 100 – P, where Q is in millions of boxes of lights sold and P is the price per box. There are two producers of lights, Everglow and Dimlit. They have identical cost functions: a. Unable

> Suppose the airline industry consisted of only two firms: American and Texas Air Corp. Let the two firms have identical cost functions, C(q) = 40q. Assume the demand curve for the industry is given by P = 100 – Q and that each firm expects the other to b

> Suppose that two competing firms, A and B, produce a homogeneous good. Both firms have a marginal cost of MC = $50. Describe what would happen to output and price in each of the following situations if the firms are at (i) Cournot equilibrium, (ii) collu

> Suppose that two identical firms produce widgets and that they are the only firms in the market. Their costs are given by C1 = 60Q1 and C2 = 60Q2, where Q1 is the output of Firm 1 and Q2 the output of Firm 2. Price is determined by the following demand c

> Ajax Computer makes a computer for climate control in office buildings. The company uses a microprocessor produced by its upstream division, along with other parts bought in outside competitive markets. The microprocessor is produced at a constant margin

> Review the numerical example about Race Car Motors. Calculate the profit earned by the upstream division, the downstream division, and the firm as a whole in each of the three cases examined: (a) there is no outside market for engines; (b) there is a c

> Why is there no market supply curve under conditions of monopoly?

> The House Products Division of Acme Corporation manufactures and sells digital clock radios. A major component is supplied by the electronics division of Acme. The cost functions for the radio and the electronic component divisions are, respectively, Not

> Reebok produces and sells running shoes. It faces a market demand schedule P = 11 – 1.5QS, where QS is the number of pairs of shoes sold and P is the price in dollars per pair of shoes. Production of each pair of shoes requires 1 square yard of leather.

> Give some examples of third-degree price discrimination. Can third-degree price discrimination be effective if the different groups of consumers have different levels of demand but the same price elasticities?

> Electric utilities often practice second-degree price discrimination. Why might this improve consumer welfare?

> How does a car salesperson practice price discrimination? How does the ability to discriminate correctly affect his or her earnings?

> Suppose a firm can practice perfect, first-degree price discrimination. What is the lowest price it will charge, and what will its total output be?

> How can a firm check that its advertising-to-sales ratio is not too high or too low? What information does it need?

> Why is it incorrect to advertise up to the point that the last dollar of advertising expenditures generates another dollar of sales? What is the correct rule for the marginal advertising dollar?

> How does tying differ from bundling? Why might a firm want to practice tying?

> How does mixed bundling differ from pure bundling? Under what conditions is mixed bundling preferable to pure bundling? Why do many restaurants practice mixed bundling (by offering a complete dinner as well as an à la carte menu) instead of pure bundling

> We write the percentage markup of prices over marginal cost as (P – MC)/P. For a profit maximizing monopolist, how does this markup depend on the elasticity of demand? Why can this markup be viewed as a measure of monopoly power?

> Why did MGM bundle Gone with the Wind and Getting Gertie’s Garter? What characteristic of demands is needed for bundling to increase profits?

> In the town of Woodland, California, there are many dentists but only one eye doctor. Are senior citizens more likely to be offered discount prices for dental exams or for eye exams? Why?

> Why is the pricing of a Gillette safety razor a form of two-part tariff? Must Gillette be a monopoly producer of its blades as well as its razors? Suppose you were advising Gillette on how to determine the two parts of the tariff. What procedure would yo

> How can a firm determine an optimal two-part tariff if it has two customers with different demand curves?

> How is peak-load pricing a form of price discrimination? Can it make consumers better off? Give an example.

> When pricing automobiles, American car companies typically charge a much higher percentage markup over cost for “luxury option” items (such as leather trim, etc.) than for the car itself or for more “basic” options such as power steering and automatic tr

> How do the antitrust laws limit market power in the United States? Give examples of major provisions of the laws.

> Show why optimal, third-degree price discrimination requires that marginal revenue for each group of consumers equals marginal cost. Use this condition to explain how a firm should change its prices and total output if the demand curve for one group of c

> Why is there a social cost to monopsony power? If the gains to buyers from monopsony power could be redistributed to sellers, would the social cost of monopsony power be eliminated? Explain briefly.

> What are some sources of monopsony power? What determines the amount of monopsony power an individual firm is likely to have?

> What is meant by the term “monopsony power”? Why might a firm have monopsony power even if it is not the only buyer in the market?

> How should a monopsonist decide how much of a product to buy? Will it buy more or less than a competitive buyer? Explain briefly.

> Why will a monopolist’s output increase if the government forces it to lower its price? If the government wants to set a price ceiling that maximizes the monopolist’s output, what price should it set?

> Why is there a social cost to monopoly power? If the gains to producers from monopoly power could be redistributed to consumers, would the social cost of monopoly power be eliminated? Explain briefly.

> What are some of the different types of barriers to entry that give rise to monopoly power? Give an example of each.

> A monopolist faces the following demand curve: Q = 144/P2 where Q is the quantity demanded and P is price. Its average variable cost is AVC = Q1/2 and its fixed cost is 5. a. What are its profit-maximizing price and quantity? What is the resulting pro

> A certain town in the Midwest obtains all of its electricity from one company, Northstar Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split the profits equally at the end of each year. The CEO of the

> Suppose that BMW can produce any quantity of cars at a constant marginal cost equal to $20,000 and a fixed cost of $10 billion. You are asked to advise the CEO as to what prices and quantities BMW should set for sales in Europe and in the United States.

> There are 10 households in Lake Wobegon, Minnesota, each with a demand for electricity of Q = 50 – P. Lake Wobegon Electric’s (LWE) cost of producing electricity is TC = 500 + Q. a. If the regulators of LWE want to make sure that there is no deadweight

> Dayna’s Doorstops, Inc. (DD) is a monopolist in the doorstop industry. Its cost is C = 100 – 5Q + Q2, and demand is P = 55 – 2Q. a. What price should DD set to maximize profit? What output does the firm produce? How much profit and consumer surplus does

> The employment of teaching assistants (TAs) by major universities can be characterized as a monopsony. Suppose the demand for TAs is W = 30,000 – 125n, where W is the wage (as an annual salary), and n is the number of TAs hired. The supply of TAs is give

> You produce widgets for sale in a perfectly competitive market at a market price of $10 per widget. Your widgets are manufactured in two plants, one in Massachusetts and the other in Connecticut. Because of labor problems in Connecticut, you are forced t

> Michelle’s Monopoly Mutant Turtles (MMMT) has the exclusive right to sell Mutant Turtle t-shirts in the United States. The demand for these t-shirts is Q = 10,000/P2. The firm’s short-run cost is SRTC = 2000 + 5Q, and its long-run cost is LRTC = 6Q. a.

> A monopolist faces the demand curve P = 11 – Q, where P is measured in dollars per unit and Q in thousands of units. The monopolist has a constant average cost of $6 per unit. a. Draw the average and marginal revenue curves and the average and marginal c

> One of the more important antitrust cases of the 20th century involved the Aluminum Company of America (Alcoa) in 1945. At that time, Alcoa controlled about 90 percent of primary aluminum production in the United States, and the company had been accused

> A drug company has a monopoly on a new patented medicine. The product can be made in either of two plants. The costs of production for the two plants are MC1 = 20 + 2Q1 and MC2 = 10 + 5Q2. The firm’s estimate of demand for the product is P = 20 – 3(Q1 +

> A firm has two factories for which costs are given by: Factory #1: C1(Q1) = 10Q12 Factory #2: C2(Q2) = 20Q22 The firm faces the following demand curve: P = 700 – 5Q where Q is total output – i.e., Q = Q1 + Q2. a. On a diagram, draw the marginal cost c

> Suppose a profit-maximizing monopolist is producing 800 units of output and is charging a price of $40 per unit. a. If the elasticity of demand for the product is –2, find the marginal cost of the last unit produced. b. What is the firm’s percentage ma

> In Example 11.1, we saw how producers of processed foods and related consumer goods use coupons as a means of price discrimination. Although coupons are widely used in the United States, that is not the case in other countries. In Germany, coupons are il

> Suppose that an industry is characterized as follows: C = 100 + 2q2………….each firm’s total cost function MC = 4q………………..firm’s marginal cost function P = 90 – 2Q…………… industry demand curve MR = 90 – 4Q……industry marginal revenue curve a. If there is

> The following table shows the demand curve facing a monopolist who produces at a constant marginal cost of $10: Price…….……………………………………………………………Quantity 18………………………………………………………………………………...0 16..…………………………………………………………………………………4 14..………………………………………………………………

> A firm faces the following average revenue (demand) curve: P = 120 – 0.02Q where Q is weekly production and P is price, measured in cents per unit. The firm’s cost function is given by C = 60Q + 25,000. Assume that the firm maximizes profits. a. What

> A monopolist firm faces a demand with constant elasticity of –2.0. It has a constant marginal cost of $20 per unit and sets a price to maximize profit. If marginal cost should increase by 25 percent, would the price charged also rise by 25 percent?

> Caterpillar Tractor, one of the largest producers of farm machinery in the world, has hired you to advise it on pricing policy. One of the things the company would like to know is how much a 5-percent increase in price is likely to reduce sales. What wou

> Will an increase in the demand for a monopolist’s product always result in a higher price? Explain. Will an increase in the supply facing a monopsonist buyer always result in a lower price? Explain.

> Externalities arise solely because individuals are unaware of the consequences of their actions. Do you agree or disagree? Explain.

> Consider a market in which a firm has monopoly power. Suppose in addition that the firm produces under the presence of either a positive or a negative externality. Does the externality necessarily lead to a greater misallocation of resources?

> When do externalities require government intervention? When is such intervention unlikely to be necessary?

> Compare and contrast the following three mechanisms for treating pollution externalities when the costs and benefits of abatement are uncertain: (a) an emissions fee, (b) an emissions standard, and (c) a system of transferable emissions permits.

> If the demand for drive-in movies is more elastic for couples than for single individuals, it will be optimal for theaters to charge one admission fee for the driver of the car and an extra fee for passengers. True or false? Explain.

> A monopolist is producing at a point at which marginal cost exceeds marginal revenue. How should it adjust its output to increase profit?

> Which of the following describes an externality and which does not? Explain the difference. a. A policy of restricted coffee exports in Brazil causes the U.S. price of coffee to rise – an increase which in turn also causes the price of tea to rise. b. A

> Explain why the median voter outcome need not be efficient when majority-rule voting determines the level of public spending.

> Public television is funded in part by private donations, even though anyone with a television set can watch for free. Can you explain this phenomenon in light of the free rider problem?

> A village is located next to 1000 acres of prime grazing land. The village presently owns the land and allows all residents to graze cows freely. Some members of the village council have suggested that the land is being overgrazed. Is this likely to be t

> Public goods are both nonrival and nonexclusive. Explain each of these terms and show clearly how they differ from each other.

> Why does free access to a common property resource generate an inefficient outcome?

> An emissions fee is paid to the government, whereas an injurer who is sued and held liable pays damages directly to the party harmed by an externality. What differences in the behavior of victims might you expect to arise under these two arrangements?

> George and Stan live next door to each other. George likes to plant flowers in his garden, but every time he does, Stan’s dog comes over and digs them up. Stan’s dog is causing the damage, so if economic efficiency is to be achieved, it is necessary that

> To encourage an industry to produce at the socially optimal level, the government should impose a unit tax on output equal to the marginal cost of production. True or false? Explain.

> Four firms located at different points on a river dump various quantities of effluent into it. The effluent adversely affects the quality of swimming for homeowners who live downstream. These people can build swimming pools to avoid swimming in the river

> Price discrimination requires the ability to sort customers and the ability to prevent arbitrage. Explain how the following can function as price discrimination schemes and discuss both sorting and arbitrage: a. Requiring airline travelers to spend at l

> Assume that scientific studies provide you with the following information concerning the benefits and costs of sulfur dioxide emissions: Benefits of abating (reducing) emissions: MB = 500 – 20A Costs of abating emissions: MC = 200 + 5A where A is the q

> A computer programmer lobbies against copyrighting software, arguing that everyone should benefit from innovative programs written for personal computers and that exposure to a wide variety of computer programs will inspire young programmers to create ev

> A number of firms have located in the western portion of a town after single-family residences took up the eastern portion. Each firm produces the same product and in the process emits noxious fumes that adversely affect the residents of the community.

> The Georges Bank, a highly productive fishing area off New England, can be divided into two zones in terms of fish population. Zone 1 has the higher population per square mile but is subject to severe diminishing returns to fishing effort. The daily fish

> Reconsider the common resource problem given in Example 18.7 given blow. Suppose that crawfish popularity continues to increase, and that the demand curve shifts from C = 0.401 – 0.0064F to C = 0.50 – 0.0064F. How does

> There are three groups in a community. Their demand curves for public television in hours of programming, T, are given respectively by W 1 = $200 – T, W 2 = $240 – 2T, W 3 = $320 – 2T. Suppose public television is a pure public good that can be produce

> A beekeeper lives adjacent to an apple orchard. The orchard owner benefits from the bees because each hive pollinates about one acre of apple trees. The orchard owner pays nothing for this service, however, because the bees come to the orchard without hi

> Refer back to Example 18.5 given below on global warming. Table 18.3 shows the annual net benefits from a policy that reduces GHG emissions by 1 percent per year. At what discount rate is the NPV of this policy just equal to zero? EXAMPLE 18.5 GLOBAL

> In a market for dry cleaning, the inverse market demand function is given by P=100−Q and the (private) marginal cost of production for the aggregation of all dry cleaning firms is given by MC=10+Q. Finally, the pollution generated by the dry cleaning pro

> The market for paper in a particular region in the United States is characterized by the following demand and supply curves QD =160,000−2000P and QS = 40,000+2000P, where QD is the quantity demanded in 100-pound lots, QS is the quantity supplied in 100p

> Consider a firm with monopoly power that faces the demand curve P = 100 – 3Q + 4A1/2 and has the total cost function C = 4Q2 + 10Q + A where A is the level of advertising expenditures, and P and Q are price and output. a. Find the values of A, Q, and P

> Medical research has shown the negative health effects of “secondhand” smoke. Recent social trends point to growing intolerance of smoking in public areas. If you are a smoker and you wish to continue smoking despite tougher anti-smoking laws, describe t

> Why might managers be able to achieve objectives other than profit maximization, which is the goal of the firm’s shareholders?