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econ1001_endofchapter09

# econ1001_endofchapter09 - Chapter 9 Monopoly Oligopoly and...

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Unformatted text preview: Chapter 9 Monopoly, Oligopoly, and Monopolistic Competition Problem #1, Chapter 9 • Two car manufacturers, Saab and Volvo, have fixed costs of \$1 billion and marginal costs of \$10,000 per car. If Saab produces 50,000 cars per year and Volvo produces 200,000, calculate the average production cost for each company. On the basis of these costs, which company’s market share do you think will grow in relative terms? Solution to Problem #1 (1) • Given in the question, both manufacturers have a fixed cost of \$1 billion and a marginal cost of \$10,000 per car • Marginal cost = Variable cost • Total variable cost (TVC)= Marginal cost * quantity • Saab – TVC Saab = 10,000 * 50,000 = \$500,000,000 – Total cost (TC) = Total variable cost + Total fixed cost – TC Saab = \$500,000,000 + \$1,000,000,000 = \$1.5 billion – AC Saab = \$1.5 billion / 50,000 = \$30,000 Solution to Problem #1 (2) • Volvo – TVC Volvo = 10,000 * 200,000 = \$2,000,000,000 – Total cost (TC) = Total variable cost + Total fixed cost – TC Volvo = \$2,000,000,000 + \$1,000,000,000 = \$3 billion – AC Volvo = \$3.0 billion / 200,000 = \$15,000 • Why Volvo’s average cost is only half of Saab’s even if they actually face the same fixed and marginal costs? • Volvo’s annual production is 4 times larger than Saab’s • This reveals that Volvo has a much higher market share than Saab, and thus it has a higher potential for growth relative to Saab Chapter 9, Problem 2 2) State whether the following statements are true or false, and explain why. a) In a perfectly competitive industry, the industry demand curve is horizontal, whereas for a monopoly it is downward-sloping. b) Perfectly competitive firms have no control over the price they charge for the product. c) For a natural monopoly, average cost declines as the number of units produced increases over the relevant output range. False True True 2a) In a perfectly competitive industry, the industry demand curve is horizontal, whereas for a monopoly it is downward-sloping. False Perfectly competitive firm: Firms are price-taker, no control and no influence over price. Goal is to choose the optimal output level to maximize the profit. Firms can sell as much as it wishes at the given price level. Therefore, Demand curve is perfectly elastic (horizontal) Price Quantity D Imperfectly competitive firm: Have market power: a f i r m ’ s a b i l i t y t o r a i s e t h e p r i c e o f a g o o d w i t h o u t l o s i n g a l l i t s s a l e s . They are price setter. Face a negatively sloped Demand curve Price Quantity D In the firm’s point of view, Demand curve is horizontal for Perfectly Competitive Firm Demand curve is downward-sloping for Imperfectly Competitive Firm However, the i n d u s t r y demand curve is downward-sloping in BOTH case. Supply curve and Demand curve intersect to determine the equilibrium price. 2b) Perfectly competitive firms have no control over the price they charge for the product....
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econ1001_endofchapter09 - Chapter 9 Monopoly Oligopoly and...

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