BSZ_IM_Ch06_4e - Managerial Economics and Organizational...

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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 6: Page 1 CHAPTER 6 M ARKET S TRUCTURE This chapter presents an economic analysis of market structure. It starts with perfect competition as a benchmark. Potential barriers to entry, that might limit competition, are examined. Subsequently, the chapter analyzes monopoly, monopolistic competition, and oligopoly. The chapter provides a brief introduction to elementary game theory. (Chapter 9 provides a more comprehensive treatment of game theory.) C HAPTER O UTLINE M ARKETS C OMPETITIVE M ARKETS Firm Supply Competitive Equilibrium B ARRIERS TO E NTRY Incumbent Reactions Incumbent Advantages Exit Costs M ONOPOLY M ONOPOLISTIC C OMPETITION O LIGOPOLY Nash Equilibrium Output Competition Price Competition Empirical Evidence Cooperation and the Prisoners’ Dilemma S UMMARY T EACHING THE C HAPTER This chapter presents core material that should be covered in detail in an introductory managerial economics course. We do not assign this chapter in our organizations class, since our students have taken a course in managerial economics. Our students, however, are responsible for knowing the basic concepts in the chapter. A basic understanding of competition and markets is important for the remainder of the book. Also elementary game theory is used in the appendices of several chapters. When we teach an introductory managerial economics class we spend at least two lectures on this material. We go through each of the basic market structures and discuss
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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 6: Page 2 the related graphs, making sure that the students are particularly grounded in their understanding of competitive markets and monopoly. R EVIEW Q UESTIONS Note: Questions 6-2, 6-7, and 6-8 require knowledge about the relation between the area under the marginal cost curve and total costs. This relation is not examined in detail in the book. An instructor should review this relation in class before assigning these problems. 6–1. What four basic conditions characterize a competitive market? A large number of either actual or potential buyers and sellers. Product homogeneity. Rapid dissemination of accurate information at low cost. Free entry and exit in the market. 6–2. The short-run marginal cost of the Ohio Bag Company is 2Q. Price is $100. The company operates in a competitive industry. Currently, the company is producing 40 units per period. What is the optimal short-run output? Calculate the profits that Ohio Bag is losing through suboptimal output. The optimal short-run output is where marginal cost = marginal revenue (in
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BSZ_IM_Ch06_4e - Managerial Economics and Organizational...

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