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United CH13
1.
The States Postal Service has a monopoly on non-urgent
First Class Mail and the exclusive right to put mail in private
mailboxes. Pfizer Inc. makes LIPITOR, a prescription drug that
lowers cholesterol. Cox Communications is the sole provider
of cable television service in some parts of San Diego.
a. What are the substitutes, if any, for the goods and services
described above?
Substitutes for the U.S. Postal Service include email, fax, and
private delivery services, such as FedEx or UPS. Substitutes for
Lipitor are other statin drugs, such as Zocor, non-statin drugs
that also lower cholesterol, and exercise. Substitutes for Cox
Communications include satellite television services.
b. What are the barriers to entry, if any, that protect these
three firms from competition?
The U.S. Postal Service and Pfizer are protected by legal barriers
to entry. The Postal Service has the legal right given to it by
the Private Express Statutes to be the only first class non-urgent
mail service and Pfizer has a patent on Lipitor. Cox Communications
has a natural barrier to entry because it is a natural monopoly.
It also has a legal barrier to entry because it has been given
the public franchise to be the only cable provider in its area.
c. Which of these three firms, if any, is a natural monopoly?
Explain your answer and illustrate it by drawing an
appropriate figure.
Cox Communications is the only
natural monopoly. Its average
cost curve will look similar to
that in Figure 13.1. Cox
Communications has a large fixed
cost of creating a massive
infrastructure and then a small
marginal cost when it increases
the quantity of its customers. As
a result, its economies of scale
mean that its long-run average
cost curve is downward sloping
when it intersects the demand
curve. Neither the U.S. Postal Service nor Pfizer has such strong
economies of scale so their long-run average cost curves are upward
sloping when they intersect their demand curves.
d. Which of these three firms, if any, is a legal monopoly?
Explain your answer.
Both the U.S. Postal Service and Pfizer are legal monopolies. The
Postal Service has the legal right given to it by the Private
Express Statutes to be the only first class non-urgent mail service
and Pfizer has a patent on Lipitor. Cox has a public franchise.
e. Which of these three firms are most likely to be able to profit
from price discrimination and which are most likely to sell
their good or service for a single price?
All three of the firms practice price discrimination. The second
ounce in a first class letter is less expensive to mail than the
first ounce. Lipitors price varies according to the insurance
policy a customer has. Cox Communications bundles packages of
services that have a lower price than each item taken separately
so that additional units of service are less expensive than the
initial units.
2.
Barbies Revenge: Brawl over Doll is Heading to Trial
Four years ago, Mattel Inc. exhorted its executives to help
save Barbie from a new doll clique called the Bratz. Market
share was dropping at a chilling rate, the presentation said.
Barbie needed to be more aggressive, revolutionary, and
ruthless. That call to arms has led to a federal courthouse. ...
Mattel accuses ... the maker of Bratz, of ... stealing the idea
for the pouty-lipped dolls with the big heads. Mattel is trying
to seize ownership of the Bratz line, ...
The Wall Street Journal, May 23, 2008
a.
Before Bratz entered the market, what type of monopoly did
Mattel Inc. possess in the market for the pouty-lipped dolls
with the big heads?
Mattel might have thought it had a legal monopoly to produce
pouty-lipped dolls with big heads.
b.
What is the barrier to entry that Mattel might argue should
protect it from competition in the market for Barbie dolls?
Mattel might argue that it had a patent or some other legal barrier
to entry that prevented others from producing dolls such as Bratz.
Mattel actually argued that the inventor of Bratz was working for
Mattel when he invented Bratz and because of this fact Mattel had
the legal right to be the only producer of Bratz or Bratz-like
dolls.
c.
Explain how the entry of Bratz dolls might be expected to change
the demand for Barbie dolls.
The entry of Bratz decreased the demand for Barbie dolls. As the
story reports, Barbies market share was dropping at a chilling
rate .
3.
Antitrust Inquiry Launched into Intel
The Federal Trade Commission has opened a formal probe into
whether Intel, the world's largest chipmaker, has used its
dominance to illegally stifle its few competitors. The move
follows years of complaints from smaller chip rival Advanced
Micro Devices Intel is many times larger, holding 80 percent
of the microprocessor market. ... In a sign that suggests the
chip market remains competitive, Intel said, prices for
microprocessors declined by 42.4 percent between 2000 and
2007... evidence that this industry is fiercely competitive
Intel said.
The Washington Post, June 7, 2008
a. Is Intel a monopoly in the chip market?
Intel is not a monopoly because a competitor, Advanced Micro
Devices, has a 20 percent market share. If Intel was a monopoly
it would have no competitors.
b. Evaluate the argument made by Intel that the significant
decline in prices is evidence that this industry is fiercely
competitive.
Technology has advanced rapidly in the microprocessor market.
Technological advances shift the firms marginal cost curve
downward. Even if Intel was a monopoly, such a downward shift in
the marginal cost curve would lead the firm to increase its
profit-maximizing quantity and lower its profit-maximizing price.
So the fall in price is not necessarily evidence that the industry
is competitive.
Price
Quantity
(dollars per
demanded
4.
Minnies Mineral Springs, a
bottle)
single-price monopoly, faces
(bottles per
hour)
the market demand schedule
10
0
8
1
6
2
4
3
Minnies total revenue
2
4
schedule lists the total
0
5
shown in the table.
a. Calculate Minnies total
revenue schedule.
revenue at each quantity sold.
For example, Minnies can sell 1 bottle for $8 a bottle, which
is $8 of total revenue at the quantity 1 bottle. Minnies entire
total revenue schedule is in the table in part b (on the next page).
b. Calculate its marginal revenue schedule.
Minnies marginal revenue schedule (and her total revenue schedule)
is in the table below. The marginal revenue schedule lists the
marginal revenue that results from increasing the quantity sold
by 1 bottle. For example, Minnies can sell 1 bottle for total
revenue of $8. Minnies can sell 2 bottles for $6 each, for total
revenue of $12. So by increasing the quantity sold from 1 bottle
to 2 bottles, marginal revenue is $4 a bottle ($12 minus $8). This
marginal revenue is placed midway between the quantities 1 bottle
and 2 bottles.
Price
Quantity
Total revenue
Marginal
(dollars per
demanded
(dollars)
revenue
bottle)
(bottles per
(dollars per
hour)
bottle)
10
0
0
8
8
1
8
4
6
2
12
0
4
3
12
4
2
4
8
8
0
5
0
c. Draw a graph of the market demand curve and Minnies marginal
revenue curve.
Minnies demand curve and marginal
revenue curve are in Figure 13.2 The
demand curve intersects the vertical
axis at a price of $10 and intersects
the horizontal axis at a quantity of
5. The marginal revenue curve
intersects the vertical axis at a
price of $10 and intersects the
horizontal axis at a quantity of 2.5.
d. Why is Minnies marginal revenue
less than the price?
Minnies marginal revenue is less
than her price because to sell an additional unit of output, Minnie
must lower her price on all units sold. So when Minnie sells an
additional unit of output, her revenue consists of the price she
receives for this extra unit minus what she loses on all previous
units she sells now at the new, lower price.
e. At what price is Minnies total revenue maximized?
Interpolating along the demand curve, Minnies total revenue is
maximized at a price of $5. At this price she sells 2.5 bottles
an hour for total revenue of $12.50.
f. Over what range of prices is the demand for water from Minnies
Mineral Springs elastic?
The demand for Minnies Mineral Springs water is elastic between
$5 per bottle and $10 per bottle.
g. Why will Minnie not produce a quantity at which the market
demand for water is inelastic?
Minnie will not produce a quantity at which the demand for her
water is inelastic because producing at such a price does not
maximize her profit. If Minnie is producing where her demand is
inelastic, she can decrease the quantity she produces and 1)
increase her total revenue, and 2) decrease her total cost. Because
her total revenue increases and her total cost decreases, Minnies
total profit increases. Anytime Minnies production is at a
quantity at which demand is inelastic, she can always increase
her total profit by decreasing her production.
5.
Minnies Mineral Springs faces
the demand schedule in problem 4
and has the total cost schedule in
the table.
Quantity
Total cost
produced
(dollars)
(bottles per
hour)
a. Calculate the marginal cost of
0
1
producing each output listed in
1
3
the table.
2
7
Marginal cost is the increase in
3
13
total cost that results from
4
21
increasing output by 1 unit. For
5
31
output from 1 bottle to 2 bottles,
Quantity
Marginal
total cost increases by $4. The
produced
cost
(bottles per
(dollars)
example, when Minnies increases
marginal cost of increasing
output from 1 bottle to 2 bottles
is $4. The remaining marginal
hour)
0
2
costs are calculated similarly.
The second table to the right shows
1
4
the marginal cost schedule.
b. Calculate Minnies
2
6
profit-maximizing output and
price.
3
8
Minnies profit-maximizing
output is 1.5 bottles and her
4
10
profit-maximizing price is $7a
bottle.
5
To maximize profit Minnies needs to produce the quantity at which
marginal revenue equals marginal cost. The marginal cost of
increasing the quantity from 1 bottle to 2 bottles is $4 a bottle
($7 minus $3). That is, the marginal cost at 1.5 bottles of water
is $4 a bottle. The marginal revenue of increasing the quantity
sold from 1 bottle to 2 bottles is $4 ($12 minus $8). So the marginal
revenue from 1.5 bottles is $4 a bottle. The profit-maximizing
output is 1.5 bottles. The profit-maximizing price is the highest
price that Minnies can sell the profit-maximizing output of 1.5
bottles. Minnies can sell 1 bottle for $8 and 2 bottles for $6,
so it can sell 1.5 bottles for $7 a bottle.
c. Calculate the economic profit.
Economic profit equals total revenue minus total cost. Total
revenue equals price ($7 a bottle) multiplied by quantity (1.5
bottles), which is $10.50. Total cost of producing 1 bottle is
$3 and the total cost of producing 2 bottles is $7, so the total
cost of producing 1.5 bottles is $5. Minnies economic profit
equals $10.50 minus $5, which is $5.50.
6.
La Bella Pizza can produce a pizza for a marginal cost of $2.
Its standard price is $15 a pizza. It offers a second pizza
for $5. It also distributes coupons that give a $5 rebate on
a standard- price pizza.
a. How can La Bella Pizza make a larger economic profit with this
range of prices than it could if it sold every pizza for $15?
La Bella Pizza is price discriminating, which increases its profit.
It is price discriminating along two dimensions. First, it is
charging consumers a second price for the second pizza they buy.
This sort of price discrimination essentially is moving downward
along a consumers demand curve and increasing the quantity the
consumer purchases. Second, it is giving away coupons that lower
the price on a standard-priced pizza. La Bella must have consumers
with different willingness to pay and the coupon enables La Bella
to increase its sales to the coupon users who have a lower
willingness to pay for the pizza. On both counts, La Bella is
increasing its sales and, because its marginal revenue from these
additional sales exceeds its marginal cost of $2, the additional
sales increase La Belles profit.
b. Draw a graph that illustrates
your answer to a.
Figure 13.3 illustrates La Bella
Pizzas situation. With no price
discrimination La Bella produces
300 pizzas and sells them at a price
of $10 a pizza. With the price
discrimination, some consumers buy
pizzas at a price of $15, others buy
pizzas at a price of $10 (the $15
regular price minus the $5 coupon),
and still others buy pizzas at a
price of $5. The economic profit when La Bella sells at one price
is equal to area A. When La Bella price discriminates, it makes
additional economic profit: area B from the pizzas sold at $15 and
area C from the pizzas sold at $5.
c. Can you think of a way of increasing La Bella Pizzas economic
profit even more?
La Bella could further price discriminate. For instance, it might
sell a third pizza for $4, which, given the marginal cost of $2,
would still increase economic profit.
d. Is La Bella Pizza more efficient than it would be if it charged
just one price?
A firm that can price discriminate increases its production
relative to what it would produce if it could not price discriminate.
So the quantity of pizza La Bella produces is closer to the
efficient quantity with the price discrimination that it would
be if La Bella did not price discriminate.
7.
The Saturday-Night Stay Requirement Is on Its Final Approach
The Saturday-night staythat pesky and expensive requirement
that airlines instituted to ensure that the business traveler
pays outrageous airfares if he or she wants to go home to the
family for the weekendhas gone the way of the dodo bird.
Many low-fare carriers, such as Southwest, JetBlue and AirTran,
never had the Saturday-night rule. Some of the so-called legacy
airlines, including America West and Alaska, have eliminated
the restriction. United and American did away with it in
response to competition but only on some routes. Still others,
including Continental, Delta, US Airways and Northwest, mostly
continue to enforce the rule, especially in the markets they
dominate. Experts and industry spokesmen agree that low-fare
carriers are the primary reason legacy airlines are adopting
more consumer-friendly fare structures, which include the
elimination of the Saturday-night stay, the introduction of
one-way and walk-up fares and the general restructuring of its
fares.
Los Angeles Times, August 15, 2004
a. Explain why the opportunity for price discrimination exists
for air travel.
Even though there are many airlines overall, on some flights an
airline might be the only company or one of a few on that route,
thereby giving it significant pricing power. Then, because
vacation travelers and business travelers have differing marginal
benefits from travel (and therefore different willingness to pay)
the airline is able to price discriminate between these groups.
b. How does an airline profit from price discrimination?
Airlines profit from price discrimination because they can charge
business travelers, who have a lower elasticity and a higher
willingness to pay, a high price that exceeds the price charged
vacation travelers, who have a larger elasticity and a lower
willingness to pay. By adjusting the prices they charge the
different classes of customers so that the prices are closer to
the customers willingness to pay, the airline can increase its
economic profit by transferring consumer surplus from consumers
to itself.
c. Describe the change in price discrimination in the market for
air travel when discount airlines entered the market.
The expansion of low cost carriers into routes previously served
by only one (or a very few) other carrier has increased competition
and lowered the price. More importantly the increase in
competition means that the airlines have less ability to determine
their own price and increasingly must act as perfect competitors
that take the market price as given. The less the airline can affect
the price it charges, the less it can price discriminate.
d. Explain the effect of the change in price discrimination when
discount airlines entered the market on the price and the
quantity of air travel.
The entry of discount airlines lowered the average price of tickets
and, by increasing the supply, increased the total market
quantity.
8.
The figure shows a situation similar
to that facing Calypso U.S. Pipeline,
a firm that operates a natural gas
distribution system in the United
States. Calypso is a natural monopoly
that cannot price discriminate. What
quantity will Calypso produce and
what is the price of natural gas if
Calypso is
a. An unregulated profit-maximizing
firm?
Calypso will produce 2 million cubic
feet a day and sell it for 6 cents a
cubic foot. The marginal revenue curve will run from 10 cents on
the y-axis to 2.5 cubic feet on the x-axis. The profit-maximizing
output is 2 million cubic feet at which marginal revenue equals
marginal cost. The price charged is the highest that people will
pay for 2 million cubic feet a day, which is 6 cents a cubic foot.
b. Regulated to make zero economic profit?
If Calypso is regulated to make zero economic profit, it produces
the output at which price equals average total costat the
intersection of the demand curve and the LRAC curve. Calypso will
produce 3 million cubic feet a day and charge 4 cents a cubic foot.
c. Regulated to be efficient?
If the firm is regulated to be efficient, it will produce the
quantity at which price (marginal social benefit) equals marginal
social costat the intersection of the demand curve and the
marginal cost curve. Calypso will produce 4 cubic feet a day and
charge 2 cents a cubic foot.
9
In problem 8, what is the producer surplus, consumer surplus,
and deadweight loss if Calypso is
a. An unregulated profit-maximizing firm?
If Calypso is unregulated, it produces 2 million cubic feet a day
and sells it for 6 cents a cubic foot. The consumer surplus is
$40,000, the producer surplus is $80,000, and the deadweight loss
is $40,000. The consumer surplus is the triangular area under the
demand curve and above the price. The price is 6 cents, so consumer
surplus equals (10 cents minus 6 cents) multiplied by 2 million
cubic feet/2, which is $40,000. The producer surplus is the
rectangular area under the price and above the MC curve. The price
is 6 cents, so producer surplus equals (6 cents minus 2 cents)
multiplied by 2 million cubic feet a day, which is $80,000. The
efficient output is 4 cubic feet, at which marginal cost equals
price (marginal benefit). The deadweight loss is the triangular
area between the demand (or marginal benefit) curve and the
marginal cost curve between the equilibrium quantity and the
efficient quantity. So the deadweight loss equals (4 million cubic
feet minus 2 million cubic feet) multiplied by (6 cents minus 2
cents)/2, which is $40,000 a day.
b. Regulated to make zero economic profit?
If Calypso is regulated to make zero economic profit, it produces
3 million cubic feet a day and sets a price of 4 cents a cubic
foot. The consumer surplus is $90,000, the producer surplus is
$60,000, and the deadweight loss $10,000. is The consumer surplus
is the triangular area under the demand curve and above the price.
The price is 4 cents, so consumer surplus equals (10 cents minus
4 cents) multiplied by 3 million cubic feet/2, which is $90,000.
The producer surplus is the rectangular area under the price and
above the MC curve. The price is 4 cents, so producer surplus equals
(4 cents minus 2 cents) multiplied by 3 million cubic feet, which
is $60,000. The efficient output is 4 million cubic feet, at which
marginal cost equals price (marginal benefit). The deadweight loss
is the triangular area between the demand (or marginal social
benefit) curve and the marginal cost curve between the equilibrium
quantity and the efficient quantity. So the deadweight loss equals
(4 million cubic feet minus 3 million cubic feet) multiplied by
(4 cents minus 2 cents)/2, which is $10,000 a day.
c. Regulated to be efficient?
If Calypso is regulated to be efficient, it produces 4 million
cubic feet a day and sells it for 2 cents a cubic foot. The consumer
surplus is $160,000, the producer surplus is $0, and the deadweight
loss is $0. The consumer surplus is the triangular area under the
demand curve and above the price. The price is 2 cents, so consumer
surplus equals (10 cents minus 2 cents) multiplied by 4 million
cubic feet/2, which is $160,000. There is no producer surplus
because the price equals the marginal cost. And there is no
deadweight loss because the quantity produced is the efficient
quantity.
10. The following list gives some information about seven firms.
Coca-Cola cuts its price below that of Pepsi-Cola in an attempt
to increase its market share.
A single firm, protected by a barrier to entry, produces a
personal service that has no close substitutes.
A barrier to entry exists, but the good has some close
substitutes.
A firm offers discounts to students and seniors.
A firm can sell any quantity it chooses at the going price.
The government issues Nike an exclusive license to produce golf
balls.
A firm experiences economies of scale even when it produces
the quantity that meets the entire market demand.
a. In which of the seven cases might monopoly arise?
The second, sixth, and seventh cases suggest that a monopoly might
be a possibility.
b. Which of the seven cases are natural monopolies and which are
legal monopolies?
It is not possible to determine if the second case is a legal barrier
or natural barrier to entry because we do not know the type of
barrier. The sixth case describes a legal barrier to entry because
Nike has been given an exclusive license by the government. The
seventh case is a natural monopoly because it describes the firm
as having economies of scale over the entire market demand.
c. Which can price discriminate, which cannot, and why?
Coca-Cola in the first case cannot price discriminate because
there are not separate classes of customers with different
willingness to pay. The fifth case, the firm that can sell any
quantity it wants at the going price, is a perfect competitor and
cannot price discriminate. The fourth case, the firm offering
discounts to students, and seniors, is price discriminating. The
other situations describe firms that might be able to price
discriminate if there are different classes of customers and if
the firm can determine into which class a customer falls.
11. Hot Air Balloon Rides, a
single-price monopoly,
has the demand schedule
shown in columns 1 and 2
Price
Quantity
Total
(dollars
demanded
cost
per
(rides per
(dollars
ride)
month)
per
of the table and the total
cost schedule shown in
columns 2 and 3 of the
table.
month)
220
0
80
200
1
160
180
2
260
a. Construct Hot Airs
160
3
380
total revenue and
140
4
520
marginal revenue
120
5
680
schedules.
The table showing Hot Airs total revenue schedule and marginal
revenue schedule is below. Total revenue equals price multiplied
by quantity. Marginal revenue equals the change in total revenue
divided by the change in quantity. For example, between 1 ride
and 2 rides the total revenue increases by $160 and the quantity
increases by 1 ride, so the marginal revenue equals $160/1, which
is $160. This marginal revenue is placed midway between the 1 ride
and 2 rides rows.
Price
Quantity
Total
Marginal
(dollars
demanded
revenue
revenue
per
(rides per
(dollars
(dollars
ride)
month)
per
per ride)
month)
220
0
0
200
200
1
200
160
180
2
360
120
160
3
480
80
140
4
560
40
120
5
600
b. Draw a graph of the demand curve
and Hot Airs marginal revenue
curve.
Figure 13.5 illustrates Hot Airs
demand curve and marginal revenue
curve.
c. Find Hot Airs
profit-maximizing output and
price and calculate the firms
economic profit.
HotAirs marginal cost equals
marginal revenue at 2 1/2 rides a
month, where both equal $120. From
the demand curve, the price is $170 a ride. Total economic profit
equals total revenue minus total cost. The total cost of 2 1/2
rides a month is $320. HotAirs total revenue equals the number
of rides multiplied by the price per ride, which is (2 1/2 rides
per month) ($170) = $425. So the total economic profit is total
revenue minus total cost, which is $425 $320 = $105.
d. If the government imposes a tax on Hot Airs profit, how does
its output and price change?
As a result of the tax, HotAirs fixed cost changes, but its
marginal cost does not. The profit-maximizing level of output is
still 2 1/2 rides a month and the price still equals $170. The
tax decreases HotAirs economic profit but does not change its
output or price.
e. If instead of taxing Hot Airs profit, the government imposes
a sales tax on balloon rides of $30 a ride, what are the new
profit-maximizing quantity, price, and economic profit?
A $30 a ride tax increases Hot Airs marginal cost by $30 at every
level of output. With the increase in the marginal costs, Hot Air
now sells 2 rides a month because this is the level at which the
new marginal cost equals the marginal revenue (both equal $140).
From the demand curve, Hot Air sets a price of $180 a ride. Total
economic profit equals total revenue minus total cost. The total
revenue is 2 rides $180 which is $360. The total cost is $260
plus the tax of $60, which is $320. So the new economic profit
is $360 $320 = $40.
12. Figure 13.6 illustrates the
situation facing the publisher of
the only newspaper containing
local news in an isolated
community.
a. On the graph, mark the
profit-maximizing quantity and
price.
Profit is maximized when the firm
produces the output at which
marginal cost equals marginal
revenue. The marginal revenue
curve runs from 100 on the y-axis
to 500 on the x-axis. The marginal revenue curve cuts the marginal
cost curve at the quantity 267 newspapers a day. The highest price
for which the publisher can sell 267 newspapers a day is read from
the demand curve. So the profit-maximizing quantity is 267
newspapers a day and price is 73 cents a paper.
b. On the graph show the publishers total revenue per day
The daily total revenue is $194.91 (267 papers at 73 cents each).
This amount is equal to the rectangular area C in Figure 13.7 (on
the next page).
c. At the price charged, is the demand for this newspaper elastic
or inelastic? Why?
Demand is elastic. Along a straight-line demand curve, demand is
elastic at all prices above the midpoint of the demand curve. The
price at the midpoint is 50 cents. So at 73 cents a paper, demand
is elastic.
d. What are consumer surplus and
deadweight loss? Mark each on
your graph.
Figure 13.7 shows the consumer
surplus, area A, and the
deadweight loss, area B. The
consumer surplus is $36.05 a day
and the deadweight loss is $8.65
a day. The consumer surplus is the
area marked A in Figure 13.7 and
the deadweight loss is the darker
area marked B in the figure.
Consumer surplus is the area under
the demand curve and above the price. The price is 73 cents, so
consumer surplus equals (100 cents minus 73 cents) multiplied by
267/2 papers a day, which is $36.05 a day. Deadweight loss arises
because the publisher does not produce the efficient quantity.
Output is restricted to 267 newspapers rather than 400, and the
price is increased to 73 cents rather than 60 cents. The deadweight
loss equals (73 cents minus 46.6 cents) multiplied by 133/2, $17.56.
e. Explain why this market might encourage rent seeking.
This market would encourage rent seeking because the producer is
making an economic profit. Other entrepreneurs would like to make
this economic profit and will rent seek in an attempt to do so.
f. If this market were perfectly
competitive, what would be the
quantity, price, consumer surplus,
and producer surplus? Mark each on
your graph.
The quantity would be 400 newspapers
a day and the price would be 60 cents
a newspaper. The consumer surplus is
the triangular area under the demand
curve and above the price, marked as
area A in Figure 13.8. The price is
60 cents, so consumer surplus equals
(100 cents minus 60 cents)
multiplied by 400/2 papers a day, which is $80 a day. The producer
surplus is the triangular area under the price and above the supply
curve, marked as area B in Figure 13.8. The price is 60 cents,
so producer surplus equals (60 cents minus 20 cents) multiplied
by 400/2 papers a day, or $80 a day.
13. Telecoms Look to Grow by Acquisition
A multibillion-dollar telecommunications merger announced
Thursday shows how global cellular powerhouses are scouting
for growth in emerging economies while consolidating in their
own, crowded backyards.
France Tlcom offered Thursday to buy TeliaSonera, a
Swedish-Finnish telecommunications operator Within hours,
TeliaSonera rejected the offer as too low, but analysts said
higher bidseither from France Tlcom or others could
persuade [TeliaSonera] to accept a deal.
Meanwhile, in the United States, Verizon Wireless, agreed
to buy Alltel for $28.1 billion, a deal that would make the
company the biggest mobile phone operator in the country. A
combination of France Tlcom and TeliaSonera would create the
worlds fourth-largest mobile operator smaller only than
China Mobile, Vodafone and Telefnica of Spain.
International Herald Tribune, June 5, 2008
a. Explain the rent seeking behavior of global
telecommunications companies.
France Tlcom and Verizon Wirless are rent seeking because they
are attempting to buy a significant competitor to establish a
monopoly.
b. Explain how mergers may affect the efficiency of the
telecommunications market.
The mergers would decrease the amount of competition in the
telecommunications market. To the extent that they lead to
monopoly power in that market they create a deadweight loss and
reduce the efficiency of the markets.
14. Zoloft Faces Patent Expiration
... Pfizers antidepressant Zoloft, with $3.3 billion in 2005
sales, loses patent protection on June 30. When a brand name
drug loses its patent, both the price of the drug and the dollar
value of its sales each tend to drop about 80 percent over the
next year, as competition opens to a host of generic
drugmakers. ... Some of those lost revenue will go to generic
drugmakers. But the real winners are the patients and the
insurers, who pay much lower prices. The Food and Drug
Administration insists that generics work identically to
brand-names.
CNN, June 15, 2006
a. Assume that Zoloft is the only antidepressant on the market
and that price discrimination is not an option. Draw a graph
to illustrate the market price and quantity of Zoloft sold.
Figure 13.9 shows the market for
Zoloft. Pfizer produces the
quantity at which marginal revenue
equals marginal cost. In the figure
Pfizer produces 30 million doses a
day. The price of $7 a dose comes
from the demand curve.
b. On your graph, identify consumer
surplus, producer surplus and
deadweight loss.
In Figure 13.9 the consumer surplus
is equal to area A, the area under
the demand curve and above the
price. The producer surplus is equal to area B, the area under
the price and above the supply curve. The deadweight loss is equal
to area C.
c. How might you justify protecting Pfizer from competition with
a legal barrier to entry?
Pfizer must spend hundreds of millions of dollars to develop a
drug. Once the drug is developed, the marginal cost to anyone of
producing it is low. If the market was competitive Pfizer would
not be able to recoup the hundreds of millions of dollars it spent
in development because competition would keep the price low.
Without the lure of monopoly profit from the patent, Pfizer would
not have developed Zoloft, and the patients who do take Zoloft
would not have reaped the benefits from this medication.
d. Explain how the market for an antidepressant drug changes when
a patent expires.
When the patent expires other firms can enter the market and produce
the drug. The market becomes competitive. The price falls and the
quantity increases.
e. Draw a graph to illustrate how the expiration of the Zoloft
patent will change the price and quantity in the market for
antidepressants.
Figure 13.10 shows the equilibrium
price and equilibrium quantity once
the patent expires. The market is
competitive so the equilibrium
price and equilibrium quantity are
determined at the intersection of
the demand and supply curves. In
Figure 13.10 the equilibrium price
is $5 a dose and the equilibrium
quantity is 50 million doses.
f. Explain how consumer surplus,
producer surplus, and deadweight
loss change with the expiration of the Zoloft patent.
Consumer surplus increases because the price is lower and because
consumers respond by increasing the quantity they purchase. In
Figure 13.10 the consumer surplus has increased so that it is equal
to area A, the area under the demand curve and above the price.
The producer surplus decreases because the price is lower. In the
figure the producer surplus has decreased to become area B, the
area under the price and above the supply curve. Because the market
is efficient, there is no deadweight loss.
15.
iSurrender
... Getting your hands on a new iPhone ... [means] signing ...
a two-year AT&T contract. Some markets, because of the sheer
costs of being a player, tend toward either a single firm or
a small number of firms. ... Everyone hoped and thought the
wireless market would be different. ... A telephone monopoly
has been the norm for most of American telecommunication
history, except for what may turn out to have been a brief
experimental period from 1984 through 2012 or so [I]t may
be that telephone monopolies in America are a national
tradition.
Slate, June 10, 2008
a. How does AT&T being the exclusive provider of wireless service
for the iPhone influence the wireless telecommunication
market?
AT&T being the exclusive provider of service for the iPhone limits
the amount of competition within the wireless market. With this
deal, the price of an iPhone is higher than would otherwise be
the case and the quantity of iPhone service is lower than would
otherwise be the case.
b. Explain why the wireless market may tend toward either a
single firm or a small number of firms. Why might this justify
allowing a regulated monopoly to exist in this market?
If the wireless industry is a natural monopoly, there is a natural
tendency for the market to have only one firm. The firm that
survives obtains a cost advantage over its competitors by
increasing the quantity it produces and then the firm uses that
cost advantage to drive its competitors out of business. If this
industry is a natural monopoly, then granting the firm the public
franchise to be a monopoly in exchange for regulating its price
and quantity is a reasonable public policy to avoid the deadweight
loss that would arise from an unregulated monopoly.
16. F.C.C. Planning Rules to Open Cable Market
The Federal Communications Commission is preparing to impose
significant new regulations to open the cable television market
to independent programmers and rival video services The agency
is also preparing to adopt a rule this month that would make
it easier for independent programmers, which are often small
operations, to lease access to cable channels [and] set a
cap on the size of the nations largest cable companies so that
no company could control more than 30 percent of the market. ...
The New York Times, November 10, 2007
a. What barriers to entry exist in the cable television market?
The major barrier to entry is that the cable industry is a natural
monopoly. Firms entering the market will have higher average total
costs if the amount they produce and sell is less than that of
the existing firm.
b. Are high cable prices evidence of monopoly power?
High prices are not necessarily evidence of monopoly. Prices can
be high in competitive markets if the costs are high. For instance,
the luxury car market is competitive but these cars are quite
expensive.
c. Draw a graph to illustrate the effects of the F.C.C.s new
regulations on the price, quantity, consumer surplus,
producer surplus, and deadweight loss.
Presuming that the cable market was
an unregulated monopoly before the
FCCs actions and that the market
becomes competitive after the
actions, Figure 13.11 shows what
would happen. With the cable
television market a monopoly, 200
channels are provided and the price
is $3 a channel. The consumer
surplus is equal to area A, the
producer surplus is equal to area B
+ area E, and the deadweight loss is
equal to area C + area F. Once the
market is competitive, 250 channels are provided and the price
is $2.50 a channel. Consumer surplus increases to area A + area
B + area C. Producer surplus decreases to area E + area F. There
is no deadweight loss because the market is allocatively
efficient.
17. Study Reading Between the Lines on pp. 316 317 and then answer
the following questions:
a. What does the news article mean when it says that Microsofts
main challenge comes from the marketplace rather than
government?
The article means that if Microsoft fails to respond to its
competitors, Microsofts profit might be severely diminished
because consumers no longer need Windows and Microsofts other
applications.
b. How does Microsoft try to raise barriers to the entry of
competitors?
Microsoft tries to raise barriers to entry by creating products
that compete with the products of its competitors and then
embedding the products as part of its Windows operating system.
In this fashion customers no longer need the competing products
because they already have a Microsoft version as part of Windows.
c. Compare and contrast the anti-monopoly regulation in Europe
with that in the United States.
Monopoly regulation in Europe is frequently used to protect
competitors rather than competition. For instance, the discussion
for the Reading Between the Lines article points out how the
European decision helped preserve Real Networks. In the United
States antitrust law is often devoted to preserving competition
rather than individual competitors. U.S. antitrust law generally
tends to protect and enhance allocative efficiency while European
antitrust law often tends to protect and enhance producer surplus.

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Alliant - CHEM - 101

High Thermal Conductivity MaterialsSubhash L. ShindeJitendra S. GoelaEditorsHigh ThermalConductivity MaterialsWith 133 IllustrationsEditorsSubhash L. Shind (Ed.)eSandia National Labs.P.O. Box 5800, MS 0603Albuquerque, NM 87185USAslshind@san

Ecole Hôtelière de Lausanne - MATH - 101

Section 1.11, then:x11(a) f (a) == ;aa1(b) f (a1 ) = 1 = a;a11(c) f ( a ) = = 1/2 = a1/2 ;aaC01S01.001: If f (x) =(d) f (a2 ) =1= a2 .a2C01S01.002: If f (x) = x2 + 5, then:(a) f (a) = (a)2 + 5 = a2 + 5;(b) f (a1 ) = (a1 )2 + 5 = a

Ecole Hôtelière de Lausanne - MATH - 101

1= 5;2a 11 = 5 (2a 1);1 = 10a 5;10a = 6;a=C01S01.007: If g (x) =3.5x2 + 16 and g (a) = 5, then:a2 + 16 = 5;a2 + 16 = 25;a2 = 9;a = 3 or a = 3.C01S01.008: If g (x) = x3 3 and g (a) = 5, then a3 3 = 5, so a3 = 8. Hence a = 2.C01S01.009: If

Ecole Hôtelière de Lausanne - MATH - 101

f (a + h) f (a) = [1 2(a + h)] [1 2a] = 1 2a 2h 1 + 2a = 2h.C01S01.013: If f (x) = x2 , thenf (a + h) f (a) = (a + h)2 a2= a2 + 2ah + h2 a2 = 2ah + h2 = h (2a + h).C01S01.014: If f (x) = x2 + 2x, thenf (a + h) f (a) = [(a + h)2 + 2(a + h)] [a2 + 2a]

Ecole Hôtelière de Lausanne - MATH - 101

f (x) = 0if0x < 1,3f (x) = 1if13x < 2,3f (2) = 2if23x < 1;moreover,f (x) = 3if1x < 2,3f (x) = 2if23x < 1,3f (x) = 1if13x < 0.f (x) = 3mifmx < m + 1,3f (x) = 3m + 1ifm+13x < m + 2,3f (x) = 3m + 2ifm+23x < m

Ecole Hôtelière de Lausanne - MATH - 101

C01S01.026: Given g (t) = 3 t + 4 = (t + 4)1/3 , we note that t + 4 is dened for every real number t andthe cube root of t + 4 is dened for every possible resulting value of t + 4. Therefore the domain of g is theset R of all real numbers.C01S01.027:

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we require that x = 1 so that the fraction is dened. In addition we require that the fraction be nonnegativeso that its square root will be dened. These conditions imply that both numerator and denominator bepositive or that both be negative; moreover,

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Ecole Hôtelière de Lausanne - MATH - 101

C01S01.048: Recall that A(x) = x(50 x), 0at some special numbers in its domain:x0A052251040015525x2060050. Here is a table of a few values of the function A2562530600355254040045225500It appears that when x = 25 (so the rectangle

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C01S01.053: By the result of Problem 52, the range of Round(10x) is the set of all integers, so the range11of g (x) = 10 Round(10x) is the set of all integral multiple of 10 .1C01S01.054: What works for will work for every real number; let Round2(x)

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C01S02.035: To graph f (x) = x2 9, note that there is no graph for 3 < < 3, that f (3) = 0, andxthat f (x) > 0 for x < 3 and for x > 3. If x is large positive, then x2 9 x2 = x, so the graph of fhas x-intercept (3, 0) and rises as x increases, nearly

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C01S02.039: Note that f (x) > 0 for all x other than x = 1, where f is not dened. If | x | is large, thenf (x) is near zero, so the graph of f almost coincides with the x-axis for such x. If x is very close to 1, thenf (x) is the reciprocal of a very sm

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f [ x ] := Floor [ 2x ];Plot [ f [ x ], cfw_x, 3.5, 3.5 , AspectRatio > Automatic, PlotRange > cfw_ cfw_ 3.5, 3.5 , cfw_4.5, 4.5 ];Mathematica will draw vertical lines connecting points that it shouldnt, making the graph look like treadsand risers of

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[ x 8] = 1, $1.60 if [ x 8] = 2, and so on. But this isnt quite rightwe are using the Floor function ofSection 1.1, whereas we should really be using the Ceiling function. By the result of Problem 51 of thatsection, we see that instead of costC (x) = 8

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average of these is 1.65 (to two places) and should be a good estimate of the true value of c. Alternatively,you can use a computer algebra program to nd c; in Mathematica, for example, the command Fit will tgiven data points to a sum of constant multip

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the vertical axis are degrees Fahrenheit. Remember that these are average daily temperatures; it is notuncommon for a winter low in Athens to be below 28 F and for a summer high to be as much as 92 F.806040205010015020012250300350

Ecole Hôtelière de Lausanne - MATH - 101

Section 1.3C01S03.001: The domain of f is R, the set of all real numbers; so is the domain of g , but g (x) = 0 whenx = 1 and when x = 3. So the domain of f + g and f g is the set R and the domain of f /g is the set ofall real numbers other than 1 and

Ecole Hôtelière de Lausanne - MATH - 101

(f + g )(x) =f(x) =gx21+1+ ,4 x2x2 + 14 x2 =x2 + 1(f g )(x) = ,4 x2and4 + 3x2 x4 .C01S03.006: The domain of f is the set of all real numbers other than 2 and the domain of g is the setof all real numbers other than 2. Hence the domain of

Ecole Hôtelière de Lausanne - MATH - 101

C01S03.017: The domain of f (x) = x x + 2 is the interval [2, + ), so its graph must be the oneshown in Fig. 1.3.38.C01S03.018: The domain of f (x) = 2x x2 consists of those numbers for which 2x x2 0; that is,x(2 x) 0. This occurs when x and 2 x have

Ecole Hôtelière de Lausanne - MATH - 101

C01S03.032: The graph starts with two bends when c = 5. As c increases the bends become narrowerand narrower and disappear when c = 0. Then the graph gets steeper and steeper. See the following gure.15c=5c = 5105-4-224-5-10C01S03.033: The gra

Ecole Hôtelière de Lausanne - MATH - 101

gure.10.80.6c = 50.40.2c=5-3-2-1123C01S03.037: As c increases the graph becomes wider and taller; its shape does not seem to change verymuch.C01S03.038: The length of the airfoil is approximately 1.0089 and its width is approximately 0.200

Ecole Hôtelière de Lausanne - MATH - 101

Section 1.4C01S04.001: Because g (x) = 2x increasesrst slowly, then rapidlyon the set of all real numbers, withvalues in the range (0, + ), the given function f (x) = 2x 1 must increase in the same way, but withvalues in the range (1, + ). Therefore it

Ecole Hôtelière de Lausanne - MATH - 101

C01S04.010: The graph of g (x) = sin 10x resembles that of the sine function, but with much moreactivity because of the factor 10. Multiply by the rapidly decreasing positive numbers 2x and you willsee the sine oscillations decreasing from the range [1,

Ecole Hôtelière de Lausanne - MATH - 101

f (g (x) = f (cos x) = cos x andg (f (x) = g x = cos x .C01S04.017: If f (x) = sin x and g (x) = x3 , thenf (g (x) = f x3 = sin x3 = sin x3and3g (f (x) = g (sin x) = (sin x) = sin3 x.We note in passing that sin x3 and sin3 x dont mean the same thi

Ecole Hôtelière de Lausanne - MATH - 101

C01S04.032: Recommended window: 5x5. The graph makes it evident that the equation hasexactly three solutions (approximately 3.63796, 1.86236, and 0.88947).C01S04.033: Recommended window: 5xexactly one solution (approximately 1.42773).5. The graph m

Ecole Hôtelière de Lausanne - MATH - 101

C01S04.048: We began with the viewing window 2 x 2, which showed the two smaller solutions butnot the larger solution. We rst narrowed this window to 0.9054 x 0.9052 to get the rst solution,x 0.9053. We returned to the original window and narrowed it to

Ecole Hôtelière de Lausanne - MATH - 101

Chapter 1 Miscellaneous ProblemsC01S0M.001: The domain of f (x) =interval [4, + ).x 4 is the set of real numbers x for which x 40; that is, theC01S0M.002: The domain of f consists of those real numbers x for which 2 x = 0; that is, the set of allrea

Ecole Hôtelière de Lausanne - MATH - 101

C01S0M.012: If 70F32 + 9 C590, then 7090. Hence70 3295C90 32;3895C58;1909C290;1909C2909.Answer: The Celsius temperature ranged from a low of about 21.1 C to a high of about 32.2 C.C01S0M.013: Because 25 < R < 50, 25I < IR < 50I , so

Ecole Hôtelière de Lausanne - MATH - 101

Answer:VA(V ) = 41 /3Vr=and soA = 4V2/3.2 /3,0 < V < + .It is permissible, and sometimes desirable, to use instead the domain 0V < + .C01S0M.017: The following gure shows an equilateral triangle with sides of length 2x and an altitudeof l

Ecole Hôtelière de Lausanne - MATH - 101

y (5) =1(x 0);2alternatively,2y + 10 = x.C01S0M.022: The equation 3x 2y = 4 of the other line may be written in the form y = 3 x 2, revealing2that it and L have slope 3 . Hence an equation of L is2y (3) =3(x 2);2that is,y=3x 6.2C01S0M.0