Copy of ECON200_ Week 4 - Homework

Week 4 Homework ECON 200 1) The figure below shows the cost structure for a monopolistically competitive firm. a) What quantity will this firm produce and what price will it charge in order to maximize profits? 28 units while charging $60 per unit. b) What will be the amount of profit or loss at the profit-maximizing level of production? The amount of profit will be zero because revenue is equal to actual costs. c) What is likely to happen in the long run? Is there likely to be a substantial amount of new entry into this industry? Explain. Had this firm been making a profit or incurring losses within the industry, only then would we see a substantial number of entries and exits in the industry. 2) Provide a real-life example of product differentiation, giving the exact name of the product. Provide supporting evidence. An example of product differentiation would be Coca-Cola and Pepsi. They are essentially the same drink only with a few minor differences in characteristics. 3) Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperate and both produce less corn, they can raise the price of the corn. However, if only one of them raises prices, the other producer will get all of the business. The table below represents the choices available to Mary and Raj and the potential profit for each. Mary Keep Current Price Raise Price Raj Keep Current Price (Mary $100, Raj $100) (Mary $0, Raj $200) Raise Price (Mary $200, Raj $0) (Mary $150, Raj $150) a) According to the Prisoner’s Dilemma, what is the best choice for Raj if he is unable to coordinate with Mary? What is Mary’s best choice without coordination? Is the outcome the optimal outcome for Mary and for Raj?

Week 4 Homework ECON 200 If Raj is unable to coordinate with Mary his best choice is to keep his current price. If Mary keeps her current price, both farms will still be earning a profit and if Mary raises her prices, Raj’s profits would increase leaving Mary no profits. The worst thing Raj could do is raise his prices because this would cause him to lose all of his profits. Mary’s best choice would be to keep her current price without coordination. b) If Mary and Raj could cooperate and be sure that the other person would honor the agreement, what would be the outcome? If Mary and Raj were to cooperate then the outcome would be that both of them would be earning a $150 profit.

Week 4 Homework ECON 200 5) Urban transit systems, especially those with rail systems, typically experience significant economies of scale in operation. Consider the transit system data in the table below. Urban Transit D E M A N D Quantity 1 2 3 4 5 6 7 8 9 10 Price $10 9 8 7 6 5 4 3 2 1 Marginal Revenue $10 8 6 4 2 0 -2 -4 -6 -8 C O S T S Marginal Cost $9 6 5 3 2 3 4 5 7 10 Average Cost $9 7.5 6.7 5.8 5 4.7 4.6 4.6 4.9 5.4 a) If the transit system were allowed to operate as an unregulated monopoly, what quantity would it supply and what price would it charge? Quantity of 5 and price of $6 b) If the transit system were regulated to operate at zero economic profit, what approximate quantity would it supply and what approximate price would it charge? Quantity of 6 and price of $5 c) If the transit system were regulated to provide the quantity with the lowest average cost, what output would it supply and what price would it charge? What subsidy would be necessary to ensure this efficient provision of transit services? If the transit was to be able to provide its service at the lowest average cost (4.6) it could produce at two different quantities, 7 and 8. The transit system would prefer to provide the service at a quantity of 7 because this results in a lost of $4.2. A public subsidy would need to be created to ensure that the transit system could still operate. 6) For many years, the Justice Department has tried to break up large firms like IBM, Microsoft, and most recently Google, on the grounds that their large market share made them essentially monopolies. In a global market, where U.S. firms compete with firms from other countries, would this policy make the same sense as it might in a purely domestic context? Explain. In certain conditions yes. This is due to the fact that the companies mentioned above are international companies that have most of the market share across the globe. But for other companies, that high of a market share in the US but not abroad should not be held to the same policy standards.