Chapter_12_-_Answer_to_Textbook_Problems

Chapter_12_-_Answer_to_Textbook_Problems - 12 Answers to...

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12 MONOPOLY A n s w e r s t o t h e P r o b l e m s 1. a. 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 also exercise. Substitutes for Cox Communications include satellite television services. b. 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 definitely has a natural barrier to entry because it is a natural monopoly. c. Cox Communications is the only natural monopoly. Its cost curve will look similar to Figure 12.1. 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 means that its average cost curve is downward sloping when it crosses the demand curve. d. 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 e. 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. Lipitor’s 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. a. Minnie’s total revenue schedule lists the total revenue at each quantity sold. For example, Minnie’s can sell 1 bottle for $8 a bottle, which is $8 of total revenue at the quantity 1 bottle. b. Minnie’s marginal revenue schedule lists the marginal revenue that results from increasing the quantity sold by 1 bottle. For example, Minnie’s can sell 1 bottle for a total revenue of $8. Minnie’s can sell 2 bottles for $6 each, which is $12 of total revenue at the quantity 2 bottles. So by increasing the quantity sold from 1 bottle to 2 bottles, marginal revenue is $4 a bottle ($12 minus $8). c. Minnie’s demand curve and marginal revenue curve will be similar to those in Figure 12.2 The demand curve will intersect the vertical axis at a price of $10 and will intersect the horizontal axis at a quantity of 5. The marginal revenue curve will intersect the vertical axis at a price of $10 and will intersect the horizontal axis at a quantity of 2.5. d. Minnie’s 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 because of the new, lower price.
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