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Unformatted text preview: Chapter 7 Practice A - Answers Ogden Dairy (OD) is one of many milk producers in the United States operating in the competitive market. As its vice president of operations, you are responsible for maximizing profit by adjusting output to maximize profit. As are the many other dairies, you are completely vertically integrated from dairy farm to grocery store shelves. 1. How does the milk industry fair in terms of the perfectly competitive assumptions? In your opinion, which assumptions generally hold and which do not? Explain. Homogeneity/Identical Output: As any farmer or milk wholesaler will tell you, milk is milk. The fact that individual dairies do not advertise individually, but instead use the American Dairy Council to advertise and promote the consumption of milk, is strong evidence that milk is homogeneous. That being said, the fact that certain brands can charge a higher price than others at the store tells us that different brands of milk are not perfectly identical in the eyes of consumers. Perfect Information: Milk prices are not as well known as the price of wheat on the commodity markets, or even as well known as gas prices (with big signs outside every convenience store), but prices are about as well known as other grocery store items. Many Buyers and Sellers: Are there so many brands that they cannot act strategically (e.g. cartel behavior see chapter 11) to set prices and make a positive economic profit? Probably. No Barriers to Entry: Besides health inspections, anyone can start up a dairy, so there are no barriers to entry. If all these assumptions held completely, then firms would all be price takers and would earn zero profit in the long run. Since prices are not exactly identical, firms are not price takers, but they are pretty close. 2. Do you think the market for raw milk from the farm is more or less competitive than the market for packaged gallons of milk in the store? Why? Definitely more competitive. Raw milk is a commodity, like wheat or corn. Packaged gallons come with brands and each firm may have some market power. That being said, milk prices, even at the wholesale level, are far from determined in a free market....
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- Spring '12