Unit 3b free essay sample

What happens to Hi-Tech’s profits and price of books in the short run when Hi-Tech’s patent prevents other firms from using the new technology? c. What happens in the long run when the patent expires and other firms are free to use the technology? 2. Suppose there are 1,000 hot pretzel stands operating in NYC. Each stand has the usual U-shaped ATC curve. The market demand curve for pretzels slopes downward, and the market for pretzels is in the long-run competitive equilibrium. a. Draw the current equilibrium, using graphs for the entire market and for an individual pretzel stand. b. The city decides to restrict the number of pretzel-stand licenses, reducing the number of stands to only 800. What effect will this action have on the market and on an individual stand that is still operating? Draw graphs to illustrate your answer. c. Suppose that the city decides to charge a fee for the 800 licenses, all of which are quickly sold. How will the size of the fee affect the number of pretzels sold by an individual stand? How will it affect the price of pretzels in the city? d. The city wants to raise as much revenue as possible, while ensuring that all 800 licenses are sold. How high should the city set the license fee? Show the answer on your graph. Part B: Please answer three out of the five problems for Chapter 15, p. 340-343. 3. Suppose the Clean Springs Water Company has a monopoly on bottled water sales in California. If the price of tap water increases, what is the change in Clean Springs’ profit maximizing levels of output, price, and profit? Explain in words and with a graph. 4. A small town is served by many competing supermarkets, which have constant marginal cost. a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus, and total surplus. b. Now suppose that the independent supermarkets combine into one chain. Using a new diagram, show the new consumer surplus, producer surplus, and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss? 5. The Placebo Drug Company holds a patent on one of its discoveries. a. Assuming that the production of the drug involves rising marginal cost, draw a diagram to illustrate Placebo’s profit maximizing price and quantity. Also show Placebo’s profits. b. Suppose that the government imposes a tax on each bottle of the drug produced. On a new diagram, illustrate Placebo’s new price and quantity. Compare diagram to answers in part (a)? c. In your diagram, the tax reduces Placebo’s profit. Explain why this is true. d. Instead of the tax per bottle, suppose that the government imposes a tax on Placebo of $10,000 regardless of how many bottles are produced. How does this tax affect Placebo’s price, quantity and profits? Explain. 6. Larry, Curly, and Moe run the only saloon in town. Larry wants to sell as many drinks as possible without losing money. Curly wants the saloon to bring in as much revenue as possible. Moe wants to make the largest possible profits. Using a single diagram of the saloon’s demand curve and its cost curves, show the price and quantity combinations favored by each of the three partners. Explain. 7. Many schemes for price discriminating involve some cost. For example, discount coupons take up the time and resources of both the buyer and the seller. This question considers the implications of costly price discrimination. To keep things simple, let’s assume that our monopolist’s production costs are simply proportional to output so that ATC and MC are constant and equal to each other. a. Draw the cost, demand, and MR curves for the monopolist. Show the price the monopolist would charge without price discrimination. b. In your diagram, mark the area equal to the monopolist’s profit and call it X. Mark the area equal to consumer surplus and call it Y. Mark the area equal to deadweight loss and call it Z. c. Now suppose that monopolist can perfectly price discriminate. What is the monopolist’s profit? (Give your answer in terms of X, Y and Z. ) d. What is the change in the monopolist’s profit from price discrimination? What is the change in total surplus from price discrimination? Which change is larger? Explain. (Give your answer in terms of X, Y and Z. ) e. Now suppose that there is some cost of price discrimination. To model this cost, let’s assume that the monopolist has to pay a fixed cost C to price discriminate. How would a monopolist make the decision whether to pay this fixed cost? Give your answer in terms of X, Y, Z and C. ) f. How would a benevolent social planner, who cares about total surplus, decide whether the monopolist should price discriminate? (Give your answer in terms of X, Y, Z and C. ) g. Compare your answers to parts (e) and (f). How does the monopolist’s incentive to price discriminate differ from the social planner’s? Is it possible that the monopolist will price discriminate even though it is not socially desirable? Part C: Please answer two out of the three problems for Chapter 17, p. 388-389. 8. For each of the following characteristics, say whether it describes a perfectly competitive firm, a monopolistically competitive firm, both, or neither. Explain. a. Sells a differentiated product from its competitors. b. Has MR less than price. c. Earns economic profit in the long run. d. Produces at minimum of ATC in the long run. e. Equates MR and MC. f. Charges a price above marginal cost. 9. For each of the following characteristics, say whether it describes a monopoly firm, a monopolistically competitive firm, both, or neither. Explain. a. Face a downward-sloping demand curve . Has MR less than price. c. Faces the entry of new firms selling similar products. d. Earns economic profit in the long run. e. Equates MR and MC f. Produces the socially efficient quantity of output. 10. You are hired as the consultant to a monopolistically competitive firm. The firm reports the following information about its price, MC, and ATC. Can the firm possibly maximizing profit? If the firm is pro fit maximizing, is the firm in a long-run equilibrium? If not, what will happen to restore long-run equilibrium? a. P lt; MC, P gt; ATC b. P gt; MC, P lt; ATC . P = MC, P gt; ATC d. P gt; MC, P = ATC Part D: Please answer two out of the four problems for Chapter 16, p. 368. 11. Among monopoly, oligopoly, monopolistically competition, and perfect competition, how would you classify the markets for each of the following drinks? Explain. a. Tap water b. Bottled water c. Cola d. Beer 12. The New York Times (November 30 1993) reported that â€Å"the inability of OPEC to agree last week to cut production has sent the oil market into turmoil †¦ [leading to] the lowest price for domestic crude oil since June 1990. † a. Why were the members of OPEC trying to agree to cut production? b. Why do you suppose OPEC was unable to agree on cutting production? Why did the oil market go into â€Å"turmoil† as a result? c. The newspaper also noted OPEC’s view â€Å"that producing nations outside the organization, like Norway and Britain, should do their share and cut production. † What does the phrase â€Å"do their share† suggest about OPEC’s desired relationship with Norway and Britain? 13. A case study in the chapter describes a phone conversation between the presidents of American Airlines and Braniff Airways. Let’s analyze the game between the two companies. Suppose that each company can charge either a high price for tickets or a low price. If one company charges $100, it earns low profits if the other company charges $100 also and high profits if the other company charges $200. On the other hand, if the company charges $200, it earns very low profits if the other company charges $100 and medium profits if the other company charges $200 also. a. Draw a decision box for this game. b. What is the Nash Equilibrium in this game? Explain. c. Is there an outcome that would be better than the Nash Equilibrium for both airlines? How could it be achieved? Who would lose if it were achieved? 14. A large share of the world supply of diamonds comes from Russia and South Africa. Suppose that the MC of mining diamonds is constant at $1,000 per diamond, and the demand for diamonds is described by the following schedule: P |$8,000 |7,000 |6,000 |5,000 |4,000 |3,000 |2,000 |1,000 | |Q |5,000 diamonds |6,000 |7,000 |8,000 |9,000 |10,000 |11,000 |12,000 | | a. If there were many suppliers of diamonds, what would be the price and quantity? b. If there were only one supplier of diamonds, what would be the price and quantity? c. If Russia and South Africa formed a cartel, what would be the price and quantity? If the countries split the market evenly, what would be South Africa’s production and profit? What would happen to South Africa’s profit if it increased its production by 1,000 while Russia stuck to the cartel agreement? d. Use your answer to part (c) to explain why cartel agreements are often not successful.