1. Among monopoly, oligopoly, monopolistic competition, and perfect competition, how would you cL.iv.ily the markets for each of the following drinks?
a. tap water b. bottled water c- cola d. beer
2. Classify the following markets as perfectly competitive, monopolistic, or monopolistically competitive, and explain your answers.
a. wooden no. 2 pencils b. copper c. local telephone service d. peanut butter e. lipstick
3. For each of Ihe following characteristics, say whether it describes a perfectly competitive firm,a monopolistically competitive firm, both, or neither.
a. Sells a product differentiated from that of its competitors b. Has marginal revenue less than price c. Earns economic profit in the long run d. Pnxduces at minimum of average total cost in the long run e. Equates marginal revenue and marginal cost f. Charges a price above marginal cost i. For each of the following characteristics, say whether it describes a monopoly firm, a monopolistically competitive firm, both, or neither.
a. Faces a downward-sloping demand curve b. Has marginal revenue less than price c. Faces the entry of new firms selling similar products d. Earns economic profit in the long run c- Equates marginal revenue and marginal cost f. Produces the socially effkk-nt quantity of output
5. You are hired as the consultant to a monop*>-listically competitive firm. The firm reports the following information about its price, marginal cost, and average total cost. Can the firm possi bly be maximizing profit? If not, what should it do lo increase profit? If the firm is profil maximizing, is the firm in a long-run equilibrium? If not, what will happen to restore long-run equilibrium?
6. Sparkle is one firm of many in the market for toothpaste, which is in long-run equilibrium.
a. Draw a diagram showing Sparkle's demand curve, marginal-revenue curve, average-total-cost curve, and marginal-cost curve. Label Sparkle's profit-maximizing output and price.
b. What is Sparkle's profit? Explain.
c. On your diagram, show the consumer surplus derived from the purchase of Sparkle toothpaste. Also show the deadweight loss relative lo Ihe efficient level of output.
d. If the government forced Sparkle to pnxluce the efficient level of output, what would happen to the firm? What would happen to Sparkle's customers?
7. For each of the following pairs of firms, explain which firm would be more likely to engage in advertising:
a. a family-owned farm or a family-owned restaurant b. a manufacturer of forklifts or a manufacturer of cars c. a company that invented a very comfortable razor or a oimpanv that invented a less comfortable razor
8. Sleek Sneakers Co. is one of many firms in the market for shoes.
a. Assume that Sleek iscurrently earning short-run economic profits. On a correctly labeled diagram, show Sleek's profit-maximizing output and price, as well as the area representing profit, b. What happens to Sleek's price, output, and profit in the long run? Explain this change in word», and show it on a new diagram.
c. Suppose that over time consumers become more focused on stylistic differences among shoe brands. How would this change in attitudes affect each firm's price elasticity of demand? In the k»ng run, how will this change in demand affect Sleeks price, output, and profits?
d. At the profit-maximizing price you identified in part (c), is Sleek's demand curve elastic or inelastic? Explain.
9. Thirty years ago. the market fur chicken was perfectly competitive. Then Frank Perdue began marketing chicken under his name.
a. How do you suppose Perdue created a brand name for chicken? What did he gain from doing so?
b. What did society gain from having brand-name chicken? What did society lose?
111. The makers of Tylenol pain reliever do a lot of advertising and have loyal customers. In contrast, the makers of generic acetaminophen do no advertising, and their customers shop only for the lowest price. Assume that the marginal costs of Tylenol and generic acetaminophen are the same and constant.
a. Draw a diagram showing Tylenol's demand, marginal-revenue, and marginal-cust curves. Label Tylenol's price and markup over marginal cost.
b. Repeat part (a) for a producer irf generic acetaminophen. How do the diagrams differ? Which company has the bigger markup? Explain.
c. Which company has the bigger incentive for careful quality control? Why?
11. In a box In this chapter, economist Joel
Waldfogd argues that a free market may fail to serve some customers in the presence of fixed costs. Lei's analyze this claim with an example.
a. Suppose that there are iV people who might consume a product sold by a monopoly firm. Each person has demand of i) - 2 - P. so total demand for this product is Q — Nq -2N - NP, or P = 2 - Q/N. Graph this market demand curve.
b. For Ihis market demand curve, the equation for marginal revenue is MR -2- 1Q/N. Add this marginal revenue curve to your graph.
c. To keep things simple, suppose that the marginal cost of pnducing Ihis product is zero. What quantity would a profit-maximizing monopolist produce? What price would it charge? Show this price on your graph.
d. Ignoring for the moment the fixed costs, calculate profits, consumer surplus,and total surplus at this profit-maximizing price. (These will be functions of N.)
e. Suppose now that before making this pnxj-uct, the firm has to pay fixed costs of research and development equal to *3jOOO,CCO. How large does N need to be before the profit-maximizing firm chooses to pay the fixed cost and produce this product? How large does N need to be before it is socially efficient to pay the fixed cost?
f. Discuss how this example relates to Waldfogel's arguments about the inefficiency of free markets.
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