Indiana Wesleyan University eco330 workshop 3 questions

 

 

 

 

1. An alternative energy researcher specializing in deriving oil from algae is constructing a building in Florida to take advantage of the higher levels of sunlight, temperatures, and humidity necessary to foster the growth of algae. The building is a specialized building that will have climate-controlled rooms as well as very high levels of insulation to maintain a steady temperature. It will also have an extensive array of solar panels on the roof to create more lighting and higher temperatures and humidity for algae growth. Answer the following questions regarding his move:
   1. Once the building is constructed, would you consider this building to be a “sunk

cost” or a cost that could be recoverable in the future when it is sold? Explain your response.

1. 1. From the standpoint of risk and reward, does an elaborate building specifically designed for algae production and alternative energy research seem like a speculative venture or a sound investment given the uncertain nature of the research outcomes?
   2. One of the problems with incurring costs, sunk or otherwise, is that ultimately all costs must be recovered or a firm will go out of business. What is the unique situation regarding cost recovery for a research operation such as this? Explain.

 

1. A Canadian farm family is growing “rapeseed,” also referred to as canola, which will be processed into canola oil and shipped to US markets where fast-food restaurants and consumers are using vast quantities of the product. Canadian farmers generally operate in a perfectly competitive market.
   1. Explain the concept of a “price-taker” and how a Canadian farmer is relegated to

the role of a price-taker.

 

 

1. 1. Explain how a canola farm family perceives the demand curve for their product given their role as price-takers.
   2. Explain why a profit-maximizing farm family would have a supply curve that was identical to the marginal cost curve of the operation.
2. There are generally two ways for the farm family in Question #2 to maximize profitability in their operation, either by operating at the point at which marginal revenue equals marginal costs, or alternatively, operating by maximizing the difference between Total Revenue and Total Costs.
   1. Explain the practical deficiencies for this farm family in using the “marginal

revenue equals marginal cost approach” to maximize profitability.

 

1. 1. Given the fact that the farm family produces a commodity and they are price- takers in a perfectly competitive environment, what might be the best strategy for success (i.e. maximizing profitability) in attempting to deal with these commodity prices over which they have no control?
   2. How would economies of scale and/or scope affect the farm family’s ability to be profitable in such a competitive market? Would it play a role at all? Explain.
2. Economies of scale are one of the most powerful forces in economics. Answer the following questions related to this very important principle of economics:
   1. Explain how economies of scale are particularly important to a monopolist, be

they real (in reality, there are very few examples of monopoly in the real economy) or hypothetical.

1. 1. Building on question (a.) above, in the event that a new competitor decided to enter this otherwise monopolistic market and building on their natural competitive advantage of economies of scale, what would the embedded monopolist do to thwart the new competition?

 

1. 1. Are there any economic lessons that a non-monopoly firm can learn from the hypothetical monopolist in the development of its own strategy for building a competitive advantage in the real world in which it operates? Explain.
2. One aspect of a monopolist is the immense amount of pricing power that they have in the marketplace. Answer the following questions regarding the pricing power of a hypothetical monopolist:
   1. At which point along the demand curve would a monopolist theoretically stop

raising prices? Explain.

 

1. 1. Compare and contrast the monopolist to the perfect competitor. Why is the perfect competitor a price-taker and the monopolist a price-maker? Explain.
   2. Explain the role that government regulation plays in controlling the otherwise monopolistic tendencies of a real-world market for which there is largely only one supplier of a product or service.

 

 

1. The following article depicts a rather negative view of the cell phone (wireless) telecommunications oligopoly: http://www.newyorker.com/tech/elements/the- oligopoly-problem . After reading the article, address the following questions:
   1. After examining the article, are you convinced that the cell phone suppliers

indeed have excessive levels of pricing power in the marketplace? Explain.

 

 

1. 1. Does the inference of a “cell phone monopoly” ring true given the limited pricing power of the cell phone providers? Explain.

 

1. 1. Explain the notion of “parallel pricing” that the authors believe is inherent to the cell phone industry. Are the authors of this article correct in their perception of the situation, at least in your opinion?

 

1. 1. Explain the notion of “parallel exclusion” that the authors believe is inherent to the cell phone industry. Are the authors of this article correct in their perception of the situation, at least in your opinion? What tends to drive the whole notion of limited number of suppliers – i.e. the oligopoly? Explain
2. Explain the role of cooperation that may find its way into an oligopoly. Using economic theory, when does “cooperation” go “over the line” and become “collusion?” Cite some real world examples of cooperation that have devolved to collusion.
3. This question focuses on an oligopoly and its reliance on economies of scale.
   1. Explain the role of economies of scale in the success, or perhaps lack of success, for a given supplier operating within the context of oligopoly. In particular, how can economies of scale relate to the achievement of a competitive advantage in the marketplace?
   2. Why is market share within the oligopoly so important in the achievement of economies of scale?
   3. Can an oligopoly firm ever become so large that they lose their competitive advantage due to diseconomies of scale? Explain with both narrative and an illustrative graph (no numbers).