read_attach shikarno - CH15 1. Two firms make most of the...

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CH15 1. Two firms make most of the chips that power a PC: Intel and Advanced Micro Devices. What makes the market for PC chips a duopoly? Sketch the market demand curve and cost curves that describe the situation in this market and that prevent other firms from entering. The market for CPUs is natural oligopoly, most likely a natural duopoly. There are only two firms in the market, Intel and AMD, and there are no legal barriers to entry which limit the number of firms to two. Because other firms could enter the market but do not do so supports the idea that this industry is a natural duopoly. The cost curves and demand curve for this market would be similar to those in Figure 15.1, which shows the situation for a market in which two firms can satisfy the market demand. In this situation if a new firm entered the market it be at a significant cost disadvantage compared to Intel and AMD and would likely incur economic losses. Such a prospect deters entry by new competitors. 2. The price at which Wal-Mart can buy flat panel TVs has fallen, and it is making a decision about whether to lower its selling price. Wal-Mart believes that if it cuts its price, all its competitors will cut their prices, but if it raises its price, none of its competitors will raise theirs. a. Draw a figure to illustrate the situation that Wal-Mart believes it faces in the market for flat panel TVs. Wal-Mart has a kinked demand curve, as illustrated in Figure 15.2. Wal-Mart believes that the demand for its flat panel televisions is inelastic below the existing
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price of $1,250 per flat panel television because it thinks that if it lowers its price, so too will all its competitors. However Wal-Mart believes that the demand for its flat panel televisions is elastic above the existing price because it thinks that if it raises its price, none of its competitors will raise their price. b. Do you predict that Wal-Mart will lower its price of a flat-panel TV? Explain and illustrate your answer. Wal-Mart will lower the price of its flat panel televisions if the marginal cost of a flat panel television falls by enough so that it intersects Wal-Mart’s marginal revenue curve below the break in the marginal revenue curve. In the figure, that means that the marginal cost must fall to less than $500 per flat panel television. 3. Big Joe’s Trucking has lower costs than the other 20 small truckers in the market. The market operates like a dominant firm oligopoly and is initially in equilibrium. Then the demand for trucking services increases. Explain the effects of the increase in demand on the price, output, and economic profit of a. Big Joe’s. The increase in demand means that the excess demand faced by Big Joe also increases. As a result, Big Joe’s marginal revenue increases so Big Joe’s raises its price and increases the quantity produced. Big Joe’s economic profit increases because marginal revenue exceeds marginal cost on a larger output. b. A typical small firm.
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