Grand Canyon ECN 360 Module 3 Assignment Chapters 25 and 26 Problems Solution (2015)

25-2. Consider the diagram on the facing page depicting the demand and cost conditions faced by a monopolistically competitive firm. (See page 559.)

a. What are the total revenues, total costs, and economic profits experienced by this firm?

b. Is this firm more likely in short- or long-run equilibrium? Explain.

Problem 25-5. Illustrate the store’s short-run equilibrium by plotting demand, marginal revenue, average total costs, and marginal costs. What is its total profit? (See page 560.)

Problem 25-5

OUTPUT PRICE

0 6.00

1 5.75

2 5.50

3 5.25

4 5.00

5 4.75

6 4.50

7 4.00

25-8. It is a typical Christmas electronics shopping season, and makers of flat-panel TVs are marketing the latest

available models through their own Web sites as well as via retailers such as Best Buy and Walmart.

Each manufacturer offers its own unique versions of flat-panel TVs in differing arrays of shapes and sizes.

As usual, each is hoping to maintain a stream of economic profits earned since it first introduced

these most recent models late last year or perhaps just a few months before Christmas. Nevertheless, as

sales figures arrive at the headquarters of companies such as Dell, Samsung, Sharp, and Sony, it is clear

that most of the companies will end up earning only a normal rate of return this year. (See page 560.)

a. How can makers of flat-panel TVs earn economic profits during the first few months after the introduction of new models?

b. What economic forces result in the dissipation of economic profits earned by manufacturers of flat-panel TVs?

25-12. Categorize each of the following as an experience good, a search good, or a credence good or service,

and justify your answer. (See page 563.)

a. Services of a carpet cleaning company

b. A new cancer treatment

c. Athletic socks

d. A silk necktie

25-16. A firm that sells e-books—books in digital form downloadable from the Internet - sells all e-books

relating to do-it-yourself topics (home plumbing, gardening, and the like) at the same price. At present,

the company can earn a maximum annual profit of $25,000 when it sells 10,000 copies within a year’s

time. The firm incurs a 50-cent expense each time a consumer downloads a copy, but the company must

spend $100,000 per year developing new editions of the e-books. The company has determined that it

would earn zero economic profits if price were equal to average total cost, and in this case it could sell

20,000 copies. Under marginal cost pricing, it could sell 100,000 copies. (See page 565.)

a. In the short run, what is the profit-maximizing price of e-books relating to do-it-yourself topics?

b. At the profit-maximizing quantity, what is the average total cost of producing e-books?

26.2 The table below shows recent worldwide market shares of producers of inkjet printers. (See page

576.)

Firm Share of Worldwide Market Sales

Brother 3%

Canon 17

Dell 6

Epson 18

Hewlett-Packard 41

Lexmark 13

Samsung 1

Other 1

a. In this year, what was the four-firm concentration ratio in the inkjet-printer industry?

b. In this year, what was the seven-firm concentration ratio in the inkjet-printer industry?

26-4. What is the value of the Herfindahl-Hirschman Index for the industry in Problem 26-2? (See page 577.)

Problem 26-2

Firm Share of Worldwide Market Sales

Brother 3%

Canon 17

Dell 6

Epson 18

Hewlett-Packard 41

Lexmark 13

Samsung 1

Other 1

26-8. Consider two strategically dependent firms in an oligopolistic industry, Firm A and Firm B. Firm A

knows that if it offers extended warranties on its products but Firm B does not, it will earn $6 million

in profits, and Firm B will earn $2 million. Likewise, Firm B knows that if it offers extended

warranties but Firm A does not, it will earn $6 million in profits, and Firm A will earn $2 million. The

two firms know that if they both offer extended warranties on their products, each will earn $3 million

in profits. Finally, the two firms know that if neither offers extended warranties, each will earn $5 million in profits. (See page 581.)

a. Set up a payoff matrix that fits the situation faced by these two firms.

b. What is the dominant strategy for each firm in this situation? Explain.

26-10. Explain why network effects can cause the demand for a product either to expand or to contract relative

to what it would be if there were no network effects. (See pages 583–584.)

26-12. Consider the following list, and classify each item according to the appropriate type of two-sided

market—audience-making, matchmaking, sharedinput, or transaction-based—and write a one-sentence

answer justifying your classification. (See page 585. Hint: In some cases, you may wish to check out the firms’ Web sites to assist in answering this question.)

a. Realtor.com

b. NYTimes.com

c. Linux.com

d. Paypal.com