(Barriers to Entry) Explain how economies of scale can be a barrier to entry.

Chapter 9 ECON Principles of Microeconomics, student Edition4 (William A. McEachern)

1. (Barriers to Entry) Explain how economies of scale can be a barrier to entry.

2. (Barriers to Entry) Identify the other two barriers to entry and explain how they block new firms from this market.

3. (Monopoly) Suppose that a certain manufacturer has a monopoly on the sorority and fraternity ring business (a constant-cost industry) because it has persuaded the “Greeks” to give it exclusive rights to their insignia.

a. Using demand and cost curves, draw a diagram depicting the firm’s profit-maximizing price and output level.

b. Why is marginal revenue less than price for this firm?

c. On your diagram, show the deadweight loss that occurs because the output level is determined by a monopoly rather than by a competitive market.

d. What would happen to price and output if the Greeks decided to charge the manufacturer a royalty fee of $3 per ring?

Explain why a firm with market power might decide to charge different groups different prices

4. (Conditions for Price Discrimination) List three conditions that must be met for monopolist to price discriminate successfully

5. (Perfect Price Discrimination) Why is perfectly discriminating monopolist’s marginal revenue curve identical to demand curve it faces?

Chapter 10

1. (Short-Run Profit Maximization) A monopolistically competitive firm faces the following demand and cost structure in the short run:

a. Complete the table

b. What is the highest profit or lowest available to this firm?

c. Should this firm operate or shut down in the short run? Why?

d. What is the relationship between marginal revenue and marginal cost as the firm increases output?

Output Price FC VC TC TR Profit/Loss

0 $100 $100 $0

1 90 ___ 50

2 80 ____ 90

3 70 _____ 150

4 60 _____ 230

5 50 ____ 330

6 40 ____ 450

7 30 ____ 590

2. (Monopolistic Competition and Perfect Competition Compared) Illustrated below are the marginal cost and average total cost curves for a small firm that is in long-run equilibrium.

a. Locate the long-run equilibrium if the firm is monopolistically competitive

b. Label the price and the quantity p2 and q2.

c. Draw in a demand and marginal revenue curve to illustrate long-run equilibrium if the firm is monopolistically competitive. Label the price and quantity p2 and q2.

d. How do the monopolistically competitive firm’s price and output compare to those of the perfectly competitive firm?

e. How do long-run profits compare for the two types of firms?

Dollars per unit

Quantity

3. (Characteristics of Monopolistic Competition) Why is a firm in monopolistic competition said to be competitive? In what sense is that firm monopolistic?

4. (Price Leadership) Why might a price-leadership model of oligopoly not be an effective means of collusion in an oligopoly?

5. (Collusion and Cartels) Why would each of the following induce some members of OPEC to cheat on their cartel agreement?

a. Newly joined cartel members are less-developed countries.

b. The number of cartel members doubles from 12 to 24.

c. International debts of some members grow.

d. Expectations grow that some members will cheat.

6. (Collusion and Cartels) Use revenue and cost curves to illustrate and explain the sense in which a cartel behaves like monopolist.

7. (Game Theory) Suppose there are only two automobile companies, Ford and Chevrolet. Ford believes that Chevrolet will match any price it sets, but Chevrolet too is interested in maximizing profit. Use the following price and profit data to answer the following questions.

a. What price will Ford charge?

b. What price will Chevrolet charge once Ford has set its price?

c. What id Ford profit after Chevrolet’s response?

d. If the two firms collaborated to maximize joint profits, what prices would they set?

e. Given your answer to part(d), how could undetected cheating on price cause the cheating firm’s profit to rise?

Ford’s Selling price Chevrolet Selling Price Ford’s Profits Chevrolet Profits

Millions Millions

$4, 000 $4,000 $8 $8

4,000 8,000 12 6

4, 000 12,000 14 2

8,000 4,000 6 12

8,000 8,000 10 10

8,000 12,000 12 6

12,000 4,000 2 14

12,000 8,000 6 12

12,000 12,000 7 7

8.(Game Theory) while grading a final exam, an economics professor discovers that two students have virtually identical answers. She is convinced the two cheated but cannot prove it. The professor speaks with each student separately and offers the following deal: Sign a statement admitting cheating. If both students sign the statement, each will receive an “F” for the course. If only one signs, he is allowed to withdraw from the course while the other student is expelled. If neither signs, both receive a ”C” because the professor does not have a sufficient evidence to prove cheating.

a. Draw the payoff matrix.

b. Which outcome do you expect? Why?

9. (Oligopoly Behavior) Why is firm behavior under oligopoly so difficult to predict?