Unit V Homework

1 MICROECONOMICS UNIT V HOMEWORK
Microeconomics Unit V Homework
, Student ID
Columbia Southern University
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Chapter 9
Questions 1, 2, 3, 8, and 10
1. (Barriers to Entry) Explain how economies of scale can be a barrier to entry?
A monopoly will sometimes occur naturally if a firm experiences economies of scale. In

such instances, a single firm can supply market demand at a lower average cost per unit
than could two or more firms. In such an instance the market de3mand is not great
enough to allow more than one firm to achieve sufficient economies of scale. Thus, a
single firm emerges from the competitive process as the only low-cost supplier in the
market.(McEachern, 2015).
A monopoly that emerges from economies of scale is called a natural monopoly, to

distinguish it from the artificial monopolies created by government patents, licenses, and
other legal barriers to entry. A new entrant cannot sell enough to experience the
economies of scale achieved by an established natural monopolist. Therefore, market
entry is naturally blocked (McEachern, 2015).
2. (Barriers to Entry) Identify the other two barriers to entry and explain how they block new
firms from this market?
The other two barriers to entry are:
1. Legal restrictions – Patents, licenses and other legal restrictions imposed byt the
government provide some producers with legal protection against competition.
Patents award an inventor the exclusive right to sell a good for 20 years from the
date the patent was filed with the patent office. Licenses can be awarded to firms
by the government to establish exclusive rights for that firm to supply a particular
good or service. Lastly, the government can grant things like monopoly grants
giving exclusive rights to a good or service to a firm (McEachern, 2015).
2. Control of an essential resource – This is where a monopoly’s power is based on

a firm’s control over some resource that is critical to production (McEachern,
2015).
3. (Monopoly) Suppose that a certain manufacturer has a monopoly on the sorority and
fraternity ring business (a constant-cost industry) because it has persuaded the “Greeks”
to give it exclusive right to their insignia.
a. Using demand and cost curves, draw a diagram depicting the firm’s profit-
maximizing price and output level.
b. Why is marginal revenue less than price for this firm?
Monopolies sell more goods by offering their goods at a lower price. Because of
this their demand curve slopes downward which means their marginal revenue
will decrease, resulting in the marginal revenue being less than price
c. On your diagram, show the dead weight loss that occurs because the output
level is determined by a monopoly rather than by a competitive market.
As depicted on the above, the deadweight (DW) loss would be the area on the
graph between the points, a-b-c.
d. What would happen to price and output if the Greeks decided to charge the
manufacturer a royalty fee of $3 per ring?
If the Greeks decide to impose a $3 royalty fee then the overall price would
increase, causing the demand and output to decrease.
8. (Condition for Price Discrimination) List three conditions that must be met for a
monopolist to price discriminate successfully.
1. The demand curve for the firm’s product must slope downward, indicating that
the firm is a price maker (McEachern, 2015).
2. There must be at least two groups of consumers for the product, each with a
different price elasticity of demand (McEachern, 2015).
3. The firm must be able, at little cost, to charge each group a different price for
essentially the same product (McEachern, 2015).
4. The firm must be able to prevent those who pat the lower price from reselling the
product to those facing the higher price (McEachern, 2015).
10. Why is the perfectly discriminating monopolist’s marginal revenue curve identical to the
demand curve it faces?
The perfectly discriminating monopolist’s marginal revenue curve is identical to the

demand curve because the further their output spreads they can create a different price
for the same product thus making their marginal revenue curve match their demand
curve (McEachern, 2015).
Chapter 10:
Questions 1, 2, 3, 6, 7, 8, 9, 10, 11
1. (Short-Run Profit Maximization) A monopolistically competitive firm faces the following

demand and cost structure in the short run:
TC TR Profit/Loss MC MR
Output Price FC VC
(TC=FC+VC) (TR=P*Q) (P/L=TR-MC)
(MC=TCn- (MR=TR
TCn-1) n TRn-1)
0 $100 $100 $0 $100 $0 $0 0 0
1 $90 $100 $50 $150 $90 $60 $50 $90
2 $80 $100 $90 $190 $160 $30 $40 $70
3 $70 $100 $150 $250 $210 $40 $60 $50
4 $60 $100 $230 $330 $240 $90 $80 $30
5 $50 $100 $330 $430 $250 $180 $100 $10
6 $40 $100 $450 $550 $240 $310 $120 ($10)
7 $30 $100 $590 $690 $210 $480 $140 ($30)
a. Complete the Table (Green Sections)
b. What is the highest profit or lowest loss available to this firm?
Highest: $480
Lowest: $0
c. Should this firm operate or shut down in short run? Why?
This firm should shut down in the short run because the price doesn’t equal or
exceed the variable cost.
d. What is the relationship between marginal revenue and marginal cost as the firm
increases output?
The perfect competition will earn only normal profits in the long run because it will
charge price equal to its marginal cost on the other hand monopolistically
competitive firm will earn positive profits in the short run and normal profits in the
long run due to entry of new firms in the market
2. (Monopolistic: Competition and Perfect Competition Compared) Illustrated below are the
marginal cost and average total cost curves for a small firm that is in long-run
equilibrium.
a. Locate the long-run equilibrium price and quantity if the firm is perfectly
competitive?
Locate PC on graph
b. Label the price and quantity p1 and q1.
See Graph
c. Draw in a demand and marginal revenue curve to illustrate long-run equilibrium if

the firm is monopolistically competitive. Label the price and quantity p2and q2
d. How do the monopolistically competitive firm’s price and output compare to those
of the perfectly competitive firm?
See Graph
e. How do long-run profits compare for the two types of firms?
The monopolistically competitive firm price p2 is greater than p1 and output q2 is

less than q1
3. (Charactersitics of Monopolistic Competition) Why is a firm in monopolistic competition

said to be competitive? In what sense is that firm monopolistic?
Monopolistic competition is like monopoly in the sense that firms in each of the two
markets face demand curves that slope downward (McEachern, 2015).
Monopolistic competition is like perfect competition in the sense that easy entry and exit
eliminate economic profit or economic loss in the long-run (McEachern, 2015)..
6. (Price Leadership) Why might a price-leadership model of oligopoly not be an effective

means of collusion in an oligopoly?
A price leader sets the price for the rest of the market and is typically the dominant firm
that sets the market price and other firms follow that lead, thereby avoiding price
competition. Price leadership faces obstacles. First is the fact that the practice violates
U.S. antitrust laws. Second, the greater the product differentiation among sellers, the
less effective price leadership is as a means of collusion. Third, there is no guarantee
that other firms will follow the leader. Firms that fail to follow a price increase take
business away from firms that do. Fourth, unless there are barriers to entry, a profitable
price attracts new entrants, which could destabilize the price-leadership agreement.
Finally, as with formal cartels, firms are tempted to cheat on the agreement to boost
sales and profit (McEachern, 2015).
7. (Collusion and Cartels) Why would each of the following induce some members of OPEC
to cheat on their cartel agreement?
a. Newly joined cartel members are less developed countries.
“Many of OPECs members are poor countries that rely on oil as their major source of
income, so they argue over the price and their market shares (McEachern, 2015).
b. The number of cartel members doubles from 11 to 22.
“The more firms in an industry, the more difficult it is to negotiate an acceptable

allocation of output among them. Consensus becomes harder to achieve as the
number of firms grows (McEachern, 2015)
c. International debts of some members grow.
Many OPEC members are poor countries that rely on selling their oil as their primary
source of income for their country. But increasing prices resulting from OPEC’s early
success attracted new suppliers from non-OPEC members. The higher prices also
made some members sources no longer economical to sustain. As a result of new
exploration and other oil sources, about 60 percent of the world’s oil now comes from
non-OPEC sources (McEachern, 2015).
d. Expectations grow that some members will cheat
Because oligolopolies usually operate with excess capacity, some cheat on the price.
By offering a price slightly bvelow the fixed price, any cartel member can usually
increase sales and profit. Even if cartel members keep an eagle eye on each firms
price, one firm can incresase sales by offering extra services, secret rebates, or other
concessions. Resrear4ch suggests that cheating increases as the number of firms in
the cartel grows. Cartels collapse once cheating becomes widespread (McEachern,
2015)
8. (Collusion and Cartels) Use revenue and cost curves to illustrate and explain the sense
in which a cartel behaves like a monopolist.
To maximize cartel profit, output Q must be allocated among cartel members so that
each member’s marginal cost equals C.
Any other allocatrion would result in a lower profit. Thus, for a cartel profit to be
maximized, output must be allocated so that the marginal cost for the final unit produced
by each firm is identical (McEachern, 2015).
9. (Game Theory) Suppose there are only two automobiles companies Ford and Chevrolet.
Ford believes that Chevrolet will match and price it sets, but Chevrolet too is interested in
maximizing profit data to answer the following questions.
Fords Selling Chevy’s Selling Fords Profit Chevy’s Profit

Price Price (Millions) (Millions)
$4,000 $4,000 $8 $8
$4,000 $8,000 $12 $6
$4,000 $12,000 $14 $2
$8,000 $4,000 $6 $12
$8,000 $8,000 $10 $10
$8,000 $12,000 $12 $6
$12,000 $4,000 $2 $14
$12,000 $8,000 $6 $12
$12,000 $12,000 $7 $7
a. What price will Ford charge?
$4,000
b. What price will Chevrolet charge once Ford has set its price?
$4,000
c. What is Ford’s profit after Chevrolet’s response?
$14,000,000
d. If the two firms collaborated to maximize joint profits, what prices would they set?
$8,000
e. Given your answer to part (d), how could undetected cheating on price cause the
cheating firm’s profit to rise?
If a firms cheating goes undetected then it will earn more revenue and profit as it can
charge a lesser price than its competitor and corner their respective market.
10. (Game Theory) While grading a final exam, an economics professor discovers that two
students have virtually identical answers. She is convinced the two cheated but cannot
prove it. The professor speaks with each student separately and offers the following deal:
Sign a statement admitting to cheating. If both students sign the statement, each will
receive an “F” for the course. If only one signs, he is allowed to withdraw from the course
while the other student is expelled. If neither signs, both receive a “C” because the
professor does not have sufficient evidence to prove cheating.
a. Draw the payoff matrix.
Student Student 1 Student 2 Both Sign Neither Sign

Signs Signs Statement Statement
Student 1 Withdraw Expelled F C
Student 2 Expelled Withdraw F C
b. Which outcome do you expect? Why?
I believe that neither student would sign a statement. Neither student wants to be
caught cheating nor do they want to be expelled. In this case the professor has no
physical proof of cheating other than two students with the same answers. The only
real punishment the professor can hand out due to the lack of evidence is a C grade
for both which is still a passing grade. I think that the students would rather take the
C and still pass rather than take the other consequences.
11. Why is firm behavior under oligopoly so difficult to predict?
A firm’s behavior under oligopoly is not easily predicted as they don’t fit into a specific
model. This is because they can act as a single entity or in conjunction with each other
forming a cartel. At the other extreme they may compete fiercely with each other and
spark events such as price wars (McEachern, 2015).
References
McEachern, William A. (2015) ECON Principles of Macroeconomics. Stamford, CT: Cengage
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1 MICROECONOMICS UNIT V HOMEWORK

Microeconomics Unit V Homework

Columbia Southern University

1. (Barriers to Entry) Explain how economies of scale can be a barrier to entry?

A monopoly will sometimes occur naturally if a firm experiences economies of scale. In

A monopoly that emerges from economies of scale is called a natural monopoly, to

The other two barriers to entry are:

2. Control of an essential resource – This is where a monopoly’s power is based on

b. Why is marginal revenue less than price for this firm?

The perfectly discriminating monopolist’s marginal revenue curve is identical to the

1. (Short-Run Profit Maximization) A monopolistically competitive firm faces the following

a. Complete the Table (Green Sections)

b. What is the highest profit or lowest loss available to this firm?

c. Should this firm operate or shut down in short run? Why?

b. Label the price and quantity p1 and q1.

c. Draw in a demand and marginal revenue curve to illustrate long-run equilibrium if

e. How do long-run profits compare for the two types of firms?

The monopolistically competitive firm price p2 is greater than p1 and output q2 is

3. (Charactersitics of Monopolistic Competition) Why is a firm in monopolistic competition

6. (Price Leadership) Why might a price-leadership model of oligopoly not be an effective

a. Newly joined cartel members are less developed countries.

b. The number of cartel members doubles from 11 to 22.

“The more firms in an industry, the more difficult it is to negotiate an acceptable

c. International debts of some members grow.

d. Expectations grow that some members will cheat

Fords Selling Chevy’s Selling Fords Profit Chevy’s Profit

a. What price will Ford charge?

c. What is Ford’s profit after Chevrolet’s response?

a. Draw the payoff matrix.

Student Student 1 Student 2 Both Sign Neither Sign

b. Which outcome do you expect? Why?

11. Why is firm behavior under oligopoly so difficult to predict?

McEachern, William A. (2015) ECON Principles of Macroeconomics. Stamford, CT: Cengage

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