hw ch 11 1-13

hw ch 11 1-13 - ECON 203 Chapter 11 Homework 1-13 1 In a...

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ECON 203 November 13, 2005 Chapter 11 Homework 1-13 1. In a broad sense, all products do “compete” with one another for the consumer's dollar. At issue is whether two products are in the same market. That is, are they viewed as close substitutes. If two products are in the same market, then the price of one influences the price that can be charged for another. This in turn has an impact on the seller's ability to set price. If there are many, close substitutes for the seller’s product, then the seller cannot have a monopoly because he/she will not be able to set price above the price of the close substitutes. Cross price elasticity helps because it can be used to determine whether two products are close substitutes. Such substitutes in this sense are typically costly or in some way less appealing. 2. In a pure monopoly, strong barriers to entry effectively block all potential competition. Somewhat weaker barriers may permit oligopoly. Still weaker barriers may permit the entry of a fairly large number of competing firms giving rise to monopolistic competition. And the absence of any effective entry barriers permits pure competition. Barriers to competition include economics of scale, patents and licenses, ownership or control of essential resources, and price cutting and advertising. I feel that all these barriers are socially justifiable. 3. The purely competitive seller faces a perfectly elastic demand at the price determined by market supply and demand. It is a price taker that can sell as much or as little as it wants at the going market price. The demand curve for the monopolist is very different from the pure competitor. Because the pure monopolist is the industry, the demand curve is the market demand curve. And because market demand is not perfectly inelastic, the monopolist’s demand curve is downsloping. Firms with downward-sloping demand curves are price makers. In a pure monopoly, the monopolist faces a downsloping demand curve in which each output is associated with some unique price. Thus, in deciding on what volume of output to produce, the monopolist is also indirectly determining the price it will charge. The monopolist will operate in the elastic region of the demand since in the inelastic region it can increase total revenue and reduce total cost by reducing output. To get into the inelastic region, the monopolist must lower price and increase output. Less total revenue and higher total cost yield lower profit. 4. Price Quantity Demanded Total Revenue Marginal Revenue 7.00 0 0 --- 6.50 1 6.50 6.50 6.00 2 12.00 5.50 5.50 3 16.50 4.50 5.00 4 20.00 3.50 4.50 5 22.50 2.50 4.00 6 24.00 1.50 3.50 7 24.50 .50 3.00 8 24.00 -.50 2.50 9 22.50 -1.50
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Graph: Because it must lower price for all units sold in order to increase its sales, an imperfectly competitive firm’s marginal-revenue curve lies below its downsloping demand curve. Total revenue increases at a decreasing rate, reaches a maximum, and then declines. Note that in the elastic region, TR is increasing and hence MR is positive. When TR reaches its maximum, MR
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This note was uploaded on 10/28/2007 for the course ECON 203 taught by Professor Al-sabea during the Fall '05 term at USC.

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hw ch 11 1-13 - ECON 203 Chapter 11 Homework 1-13 1 In a...

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