Chapter 10 Solutions to Monopolistic Competition

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Chapter 10

Prices, Output, and Strategy: Pure and Monopolistic Competition Solutions to Exercises
1. Pepsi and Coca-Cola bottlers face enormous supplier power from the syrup manufacturers, sell primarily to concentrated grocery store chains, and are constantly presented with many substitute firms who could provide their role in the value chain. Thus, despite high barriers to entry from high capital requirements, high switching costs, and closed distribution channels, their sustainable profitability is lower than Coca-Cola and Pepsi. The latter face almost no supplier power, few close substitutes as perceived by loyal customers, very high barriers to effective entry, low intensity of rivalry from concentrated markets, non-price tactics, and low cost-fixity with fast growing demand especially overseas. 2. MTV operates in a highly concentrated near-monopoly market where fixed costs are low and hence intensity of rivalry is reduced. MTV also faces little supplier power from numerous nonunique musical groups. The networks, in contrast, face the much greater supplier power of the NFL, NBA and Professional Baseball. MTV has few substitutes whereas the networks now face 150 channels of substitutes for each type of programming. 3. Reduced capital requirements and diminished scale economies will increase the threat of entry and reduce the sustainable industry profitability.

4. By increasing the demand for corn, the price of corn could be expected to rise in the short run. As corn becomes relatively more expensive as a feed grain, wheat and soybeans would be in more demand for feed grain purposes, also resulting in some price increases for these commodities. In the long run, given that there is excess productive agricultural capacity in the U.S., the price effects could be wiped out by supply increases.

This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

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Chapter 10/Prices, Output, and Strategy: Pure and Monopolistic Competition 24P = 192 P = $8 QD = 212 − 20(8) = 52 QS = 20 + 4(8) = 52 b. At P = $6, QD = 212 −20(6) = 92; QS = 20 +4(6) = 44 c. At P = $9, QD = 212 − 20(9) = 32; QS = 20 + 4(9) = 56 d. 20 + 6P = 212 − 20 P P = $7.385 QD = 212 − 20(7.385) = 64.3 QS = 20 + 6(7.385) = 64.3 e. 20 + 6P = 250 - 19P P = $9.2 QD = 250 − 19(9.2) = 75.2 QS = 20 + 6(9.2) = 75.2

5. a. QD = 212 − 20P = 20 + 4P = QS

6. a.

Output (units) 0 10 15 20 25 30 35 40

Total Cost $ 0 110 150 180 225 300 385 480

Marginal Cost MC = ΔTC/ΔQ 110/10=11 40/5 = 8 30/5 = 6 45/5 = 9 75/5 =15 85/5 =17 95/5 =19

Average Cost ATC = TC/Q 110/10 = 11 150/15 = 10 180/20 = 9 225/25 = 9 300/30 = 10 385/35 = 11 480/40 = 12

b. P = MR = $17 MC = 17 @ Q = 35 π = TR − TC π = 17(35) − 385 = $210 π/unit = 210/35 = $6

This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

Chapter 10/Prices, Output, and Strategy: Pure and Monopolistic Competition c. No, since MC = MR = P > ATC. Above normal profits are currently being made. 7. Q = 20,000 P = $10 FC = $60,000 VC1 = $120,000 AVC1 = VC1/Q = 120,000/20,000 = $6 ED = −2.0 a.

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If %ΔQ = + 10%, then AVC2 = $6 − .40 = $5.60

%ΔP = -5% %ΔQ = ED(%ΔP) = −2.0(−5) = +10%

(i)

%ΔQ = .10 = (Q2 − 20,000)/((Q2 + 20,000)/2) Q2 = 22,100 TR1 = P1Q1 = $10(20,000) = $200,000 TR2 − TR1 = $10,000 (5% increase) (ii) TC1 = FC1 + VC1 = 60,000 + 6(20,000) = $180,000 TC2 = FC2 + VC2 = 60,000 + 5.60(22,100) = $183,800 TC2 − TC1 = $3,800 (approximately 2.1% increase) (iii) π1 = TR1 − TC1 = $200,000 − $180,000 = $20,000 π2 = TR2 − TC2 = $210,000 − 183,800 = $26,200 π2 − π1 = $6,200 (approximately 31% increase) b. AVC3 = $6 TC3 = 60,000 + 6(22,100) = $192,600 π3 − π1 = $17,400 − $20,000 = −$2,600...
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