Answered: 4.6. LAUNDRY DETERGENT. The market for…

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter23: Managing Vertical Relationships

Section: Chapter Questions

Problem 1MC

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4.6

Transcribed Image Text:relative magnitude of these effects; and any possible difference long-run effects. 4.5. BOOK PUBLISHING. The technology of book publishing is characterized by a high fixed cost (typesetting the book) and a very low marginal cost (printing). Prices are set at much higher levels than marginal cost. However, book publishing yields a normal rate of return. Are these facts consistent with profit maximizing behavior by publishers? Which model do you think describes this industry best? 4.6. LAUNDRY DETERGENT. The market for laundry detergent is monopolistically compet- itive. Each firm owns one brand, and each brand has effectively differentiated itself so that it has some market power (i.e., faces a downward sloping demand curve). Still, no brand earns economic profits, because entry causes the demand for each brand to shift in until the seller can just break even. All firms have identical cost functions, which are U-shaped. Suppose that the government does a study on detergents and finds out they are all alike. The public is notified of these findings and suddenly drops allegiance to any brand. What happens to price when this product that was brand-differentiated becomes a commodity? What happens to total sales? What happens to the number of firms in the market? lenglibar 4.7. T-SHIRT PRINTING. The custom T-shirt printing business has many competitors, so that the perfect competition model may be considered a good approximation. Currently the market demand curve is given by Q = 120-1.5 p, whereas the market sup given by Q=-20+2 p.

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A competitive market refers to a market structure in which there are many buyers/consumer and many sellers of a product or service, and no single firm has market power.

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