problem set answers 14

problem set answers 14 - Dr. Seiji Steimetz ECON 101...

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Dr. Seiji Steimetz ECON 101 Department of Economics California State University, Long Beach Page 1 of 11 A NSWERS FOR P ROBLEM S ET 10 Chapter 14 LEARNING OBJECTIVE LEARNING OBJECTIVE 14.1: Define monopoly. Review Questions 1.1 A monopoly is the only seller of a good or service that does not have a close substitute. 1.2 Because consumers in your town could buy hardware on the Internet or by driving to another town that has a hardware store, you would not have a monopoly under the narrow definition of the term. However, because competition from on-line sellers and stores in other towns may not be sufficient to eliminate your economic profits in the long run, you may have a monopoly in the broader sense of the term. Problems and Applications 1.3 Monopoly is a pretty good name for the game Monopoly. The object of the game is to become the only owner of property, and, like a real market, once you have ownership of a set of properties you are able to increase the price. Consider what happens when someone rolls a 10 and lands on your hotel on Boardwalk. They are required to rent the property; there is no substitute, they cannot go anywhere else, you have a monopoly. An alternative version of Monopoly would be to roll the dice and then have the choice of going forward or backward. Now the player who rolls the 10 could go forward to your hotel on Boardwalk or backward to a cheaper property (New York). This ability to rent a substitute would substantially reduce the quantity of visits to your high-priced property, wiping out much of your monopoly profits. (I’ve played this version with my kids; no one ends up gaining all the property and no one is driven into bankruptcy.) 1.4 Even though local cable TV companies have a monopoly in providing cable service in a city, they face growing competition from satellite TV companies like DIRECTV and Dish Network. If consumers view satellite TV as a close substitute for cable TV, then the cable companies no longer have a monopoly. 1.5 Yes, certain prescription drugs, for example. Economists generally define a monopoly as a firm that is the only seller of a good or service that does not have a close substitute. So, it is possible to have a monopoly on a product that has substitutes, as long as they are not close substitutes. 1.6 As the source of the monopoly power is lack of substitutes, as long as new technology can draw new substitutes into the market this argument is correct. New prescription drugs, for example, will reduce the market power of existing prescription drugs that treat the same condition. But the next section mentions other barriers to entry that new technology would not always remove (such as economies of scale).
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Dr. Seiji Steimetz ECON 101 Department of Economics California State University, Long Beach Page 2 of 11 1.7 Microsoft thought that the PS2 was a poor substitute for the Xbox. If this was the case, then the demand curve for Xbox would be inelastic, Microsoft could charge a high price, and likely earn economic
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This note was uploaded on 02/11/2010 for the course ECON 101 taught by Professor Steimetz during the Fall '08 term at CSU Long Beach.

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problem set answers 14 - Dr. Seiji Steimetz ECON 101...

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