Microeconomics

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Consider a market with two​ firms, Coke and​ Pepsi, that produce soft drinks. Both firms must choose whether to charge a high price ​($1.25​) or a low price ​($0.75​) for their soft drinks. These price strategies with corresponding profits are depicted in the payoff matrix to the right. ​ Coke's profits are in red and​ Pepsi's are in blue. ​Coke's dominant strategy is to pick a price of $_________________ and​ Pepsi's dominant strategy is to pick a price of ​$_________________ What is the Nash equilibrium for this​ game?

$ .75 $.75 Coke and Pepsi will both choose a price of $.75

The figure to the right shows the market demand for electricity and the average total cost and marginal cost of producing electricity for a utility company. Suppose the utility company is a regulated natural monopoly. If government regulators want to achieve economic​ efficiency, then they will regulate a price of ​$nothing per kilowatt hour. ​(Enter a numeric response using a real number rounded to two decimal​ places.) ______________

$.16 Economic efficiency will be at the point where D=MC.

Now suppose instead that government regulators want to set the lowest price such that the utility company will not suffer a loss so that it will continue to produce in the long run. If​ so, then government regulators will set a price of ____________________ per kilowatt hour.

$.26 where D =ATC

The figure to the right illustrates the situation regarding a natural monopoly. If government regulators want to achieve economic efficiencyLOADING...​, what price should they​ regulate? (Assume the natural monopoly produces at whatever price is​ regulated). If government regulators want to achieve economic​ efficiency, they should regulate a price of $__________ In the long​ run, will the natural monopoly produce at this regulated​ price? The natural monopoly will ________ to produce because at such a​ price, it would ____________ What price could government regulators set to maximize efficiency such that the firm would not experience​ losses? Government regulators should regulate a price of ​$ _____________

$1 not continue experience losses $2.50

Consider a market with two​ firms, Target and​ Wal-Mart, that sell CDs in their music department. Both stores must choose whether to charge a high price ​($30​) or a low price ​($13​) for the new Miley Cyrus CD. These price strategies with corresponding profits are depicted in the payoff matrix.​ Target's profits are in red and​ Wal-Mart's are in blue. ​Target's dominant strategy is to pick a price of ​$___________ Wal-Mart's dominant strategy is to pick a price of $__________ What is the Nash equilibrium for this​ game?

$13 $13 The Nash equilibrium is for Target and​ Wal-Mart to both choose a price of ​$13.

Consider a market with two​ firms, Target and​ Wal-Mart, that sell CDs in their music department. Both stores must choose whether to charge a high price ​($25​) or a low price ​($17​) for the new Miley Cyrus CD. These price strategies with corresponding profits are depicted in the payoff matrix.​ Target's profits are in red and​ Wal-Mart's are in blue. ​Target's dominant strategy is to pick a price of ​$ ​Wal-Mart's dominant strategy is to pick a price of ​$ What is the Nash equilibrium for this​ game?

$17 $17 The Nash equilibrium is for Target and​ Wal-Mart to both choose a price of ​$17

Consider a Caribbean cruise route served by two cruise​ lines, Carnival and Royal Caribbean. Both lines must choose whether to charge a high price ​($290​) or a low price ​($270​) to vacationers. These price strategies with corresponding profits are illustrated in the payoff matrix to the right. ​ Carnival's profits are in red and Royal​ Caribbean's are in blue. Suppose the cruise lines decide to collude. At which outcome are joint profits​ maximized? Joint profits are maximized when Carnival picks $_____________ and Royal Caribbean picks $_________________ Is this outcome a Nash​ equilibrium? The cooperative equilibrium

$290 (high number) $290 (high number) is not a Nash equilibrium because Royal Caribbean can increase its profit by picking the low price. **One of the answers is not right!

Refer to the diagram to the right which shows cost and demand curves facing a typical firm in a constant−cost perfectly competitive industry. If the market price is​ $20, what is the amount of the​ firm's profit?

$6750 IN perfect competition, P = MCSo output is at 1,350AC at 1,350 is 15Profit = (20 - 15) x 1350 = 6,750

The graph shows a firm in a perfectly competitive market making a profit. The graph includes the​ firm's marginal cost​ curve, average total cost​ curve, and average variable cost curve. Assume the market price is ​$34.

...

Video Question : 1) If Wal-Mart charges $400, how much should Target charge? 2) If Wal-Mart charges $300, how much should Target charge? 3) Does Target have a dominant strategy? If so, what is it? 4) If Target charges $400, how much should Wal-Mart charge? 5) If Target charges $300, how much should Wal-Mart charge? 6) Does Wal-Mart have a dominant strategy? If so, what is it?

1. Target should charge $300 2. Target should charge $300 3.Target is best off to charge $300. Because regardless if Walmart charges $400 or if they charge $300, Target is better off to charge $300. This is their dominant strategy 4.Walmart should charge $300 5. Walmart should charge $300 6. They have a dominant strategy for charging $300.

The graph to the right depicts the demand for electricity from a local utility along with the average total cost and marginal cost of producing electricity. Suppose the local utility is a monopoly. What is the​ profit-maximizing quantity of electricity​? nothing million kilowatt hours per day. ​(Enter a numeric response using an​ integer.) ___________ What is the corresponding​ profit-maximizing price? ​$. 64.64 per kilowatt hour. ​(Enter a numeric response using a real number rounded to two decimal​ places.) ________________ Calculate the local utility​'s profits. ​$1.81.8 million per day. ​(Enter a numeric response using a real number rounded to two decimal​ places.) ___________

30 $.64 $1.8 .64-.58 x 30 = 1.8

the graph to the right depicts the demand for caffe lattes at a local coffeehouse along with the average total cost and marginal cost of producing lattes. Suppose the coffeehouse is in a monopolistically competitive market in the short run. How many caffe lattes should this coffeehouse produce to maximize​ profits? ____________ units What is the corresponding​ profit-maximizing price? $___________ Calculate the​ coffeehouse's profits on caffe lattes. $ ______________

34 units $2.4 $7.48

Monopoly

A firm that is the only seller of a good or service that does not have a close substitute.

The​ Herfindahl-Hirschman Index​ (HHI):

A market is concentrated if a relatively small number of firms have a large share of total sales in the market. ​Therefore, higher HHI values correspond to greater market concentration.

Oligopooly

A market structure in which a small number of interdependent firms compete.​ However, new firms will enter industries when existing firms are earning economic profits.

Dominant strategy

A strategy that is the best for a​ firm, no matter what strategies other firms use.

Alpha and Beta are the only firms selling gyros in the upscale town of Delphi. Each firm must decide on whether to offer a discount to students to compete for customers. If one firm offers a discount but the other does​ not, then the firm that offers the discount will increase its profit. The figure shows the payoff matrix for this game. If Alpha assumes that Beta would offer a student​ discount, what should it​ do?

Alpha should also offer a student discount.

Cooperative equilibrium

An equilibrium in a game in which players cooperate to increase their mutual payoff.

What is the Nash equilibrium for this​ game?

BP will advertise and the​ Mini-Mart will not advertise.

Suppose Best Buy is the only electronics store in a particular​ market, but RadioShack is thinking about entering the market. Best Buy chooses how much to produce first and then RadioShack chooses whether to enter the industry. The strategies and corresponding profits for Best Buy​ (BB) and RadioShack​ (RS) are depicted in the decision tree to the right. What will the firms​ do?

Best Buy will choose the large quantity and RadioShack will not enter. BB will choose to producer large quantity even when it can earn higher profit by producing small quantity. This is done to restrict the entry of RS in the market. If RS enters the market when BB produces large quantity then it has to suffer loss of $ 14 so RS will not enter and be at no profit no loss situation. After sometime, when RS does not enter, BB increases its profit by producing small quantity.

What is perfect price​ discrimination?

Charging every consumer a different price equal to their willingness to pay.

Refer to the diagram to the right. What is the amount of excess​ capacity?

Q4−Q2 units

Suppose a market has twenty firms, each with 5% market share. What is the​ Herfindahl-Hirschman Index​ (HHI) of concentration for this​ market?

The HHI is 500 HHI = 20- x 5^2 HHI = 20 x 25 HHI = 500

What is the Nash equilibrium for this​ game?

The Nash equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce a high output. ***The Nash equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a high output. Best Response for Saudi Arabia BRs(Low) = Low BRs(High) = High Best Response for Kuwait BRK(Low) = High BRK(High) = High The nash equilibrium is (High, High)

Consider a market with two​ firms, Kellogg and​ Post, that sell breakfast cereals. Both companies must choose whether to charge a high price ​($4.00​) or a low price ​($2.50​) for their cereals. These price​ strategies, with corresponding​ profits, are depicted in the payoff matrix to the right.​ Kellogg's profits are in red and​ Post's are in blue. What is the cooperative equilibrium for this​ game?

The cooperative equilibrium is for Kellogg and Post to both choose a price of ​$4.00.

Consider the market for oil. Suppose for simplicity that there are only two oil producing countries—Saudi Arabia and Kuwait. Both countries must choose whether to produce a low output or a high output. These output strategies with corresponding profits are depicted in the payoff matrix. ​Kuwait's profits are in red and Saudi​ Arabia's are in blue. Suppose the two countries form a cartel. What is the cooperative equilibrium

The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a high output. ***The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a low output.

For a natural monopoly to exist

a firm's long-run average cost curve must exhibit economies of scale throughout the relevant range of market demand.

A dominant strategy is

a strategy that is the best for a firm no matter what strategies other firms use.

Baxter​ International, a manufacturer of hospital​ supplies, acquired American Hospital​ Supply, a distributor of hospital supplies. This is an example of

a vertical merger.

Bradford is a small town that currently has no​ fast-food restaurants.​ McDonald's and Burger King are both considering entering this market. Burger King will wait until​ McDonald's has made its decision before deciding whether to enter. Use the decision tree below to determine the optimal strategy for each​ company, assuming that the minimum rate of return that owners of​ fast-food restaurants require on their investment is 15​%. a. What is the optimal strategy for Burger​ King? b. What is the optimal strategy for​ McDonald's?

a. enter the market whether or not McDonalds builds a small store or a large store b. build a small store

The economic analysis of monopolistic competition shows that market forces eliminate profits in the long run.​ However, it is possible for a firm to continue to earn economic profits if the firm

adopts new technologies that enable it to lower its cost of production.

A town has two gas ​stations, BP and the​ Mini-Mart (MM). The gas stations must choose whether to advertise their gasoline. The advertising strategies with corresponding profits are illustrated in the payoff matrix to the right. ​ BP's profits are in red and the​ Mini-Mart's are in blue. What is each​ firm's dominant​ strategy? ​BP's dominant strategy is to ______________ and the​ Mini-Mart's dominant strategy is to _________________

advertise not advertise

Suppose a local​ McDonald's hamburger restaurant raises the price of its cheeseburgers from​ $2.00 to​ $2.50. What will happen to the quantity of​ McDonald's cheeseburgers​ demanded? If​ McDonald's raises the price of​ it's cheeseburgers, then

all of​ McDonald's customers will continue to demand​ McDonald's cheeseburgers because cheeseburgers from other​ fast-food restaurants are at least slightly differentiated.

barrier to entry

anything that keeps new firms from entering an industry in which firms are earning economic profits.

Are monopolistically competitive firms efficient in​ long-run equilibrium? Monopolistically competitive firms

are not productively efficient because they do not produce at minimum average total cost and they are not allocatively efficient because they produce where price is greater than marginal cost.

Refer to the diagram to the right. Compared to a perfectly competitive​ market, consumer surplus is lower in a monopoly by an amount equal to the

area P1P2EF.

Refer to the diagram to the right which shows cost and demand curves facing a profit−maximizing perfectly competitive firm. Identify the short run shut down point for the firm.

b

Why do oligopolies​ exist?

barriers to entry

What is the difference between a horizontal merger and a vertical​ merger? A horizontal merger is a merger

between firms in the same​ industry, while a vertical merger is a merger between firms at different stages of the production of a good.

If a firm could practice perfect price​ discrimination, it would

charge every buyer a different price.

An agreement among firms to charge the same price or otherwise not to compete is called

collusion.

How are decision trees used to analyze sequential​ games? A decision tree

contains decision nodes where firms must make​ decisions, arrows illustrating the​ decisions, and terminal nodes showing the resulting rates of return.

What happens if a perfectly competitive industry becomes a​ monopoly? Suppose the demand curve in the figure is market demand and the corresponding market supply curve represents the marginal cost of production. Compared to perfect​ competition, a​ profit-maximizing monopoly would ___________ output by _______________ units In​ addition, a monopoly would ______________ price by ___________

decrease ..... by 2 6 - 4 = 2 lower......$2

What is​ "natural" about a natural​ monopoly? A natural monopoly

develops automatically due to diseconomies of scale.

Profitability is partially determined by the​ firm's ability to create value for its customers. How can a firm create this type of​ value? Firms can create value for their customers by

differentiating their product from competing products

What are the most important barriers to​ entry? The most important barriers to entry are

economies of​ scale, ownership of a key​ input, and government imposed barriers.

Is perfect price discrimination economically​ efficient? Perfect price discrimination is

efficient because it converts into producer surplus what had been consumer surplus and deadweight loss.

The graph depicts the demand​ (and marginal​ revenue) for a monopolistically competitive​ firm's shampoo along with the average total cost and marginal cost of producing shampoo in the short run. As the market for shampoo moves toward a​ long-run equilibrium, firms will ________ the industry this will shift the demand curves for existing firms to the ________ and the demand curves of existing firms will become _________ elastic

exit right less

What are the most important differences between perfectly competitive markets and monopolistically competitive​ markets? Unlike in perfectly competitive​ markets, in monopolistically competitive​ markets,

firms face​ downward-sloping demand​ curves, and the products competitors sell are differentiated.

Higher HHI values correspond to _______________ market concentration

greater

A profit maximizing​ monopoly's price is

greater than the price that would prevail if the industry is perfectly competitive.

Which type of merger is more likely to increase the market power of a newly merged​ firm? ________________________ mergers are more likely to increase market power.

horizontal

A perfectly competitive firm faces a demand curve that is

horizontal.

A characteristic found only in oligopolies is

interdependence of firms.

Describe a​ monopoly's demand curve. A​ monopoly's demand curve

is the same as the demand curve for the product.

Is the cooperative equilibrium likely to​ occur? The cooperative equilibrium

is unlikely to occur because charging ​$4.00 is not a dominant strategy.

If a perfectly competitive firm achieves productive efficiency then

it is producing the good it sells at the lowest possible cost.

If a firm faces a downward-sloping demand curve

it must reduce its price to sell more units

The​ firm's short−run supply curve is its

marginal cost curve from c and above.

For a perfectly competitive​ firm, at profit maximization

marginal revenue equals marginal cost

Is zero economic profit inevitable in the long run for monopolistically competitive​ firms? In the long​ run, monopolistically competitive firms

may continue to earn profit by reducing costs.

How do barriers to entry affect the extent of​ competition, or lack​ thereof, in an​ industry? Without barriers to​ entry,

new firms will enter industries where firms are earning economic profits.

The figure shows the cost and demand curves for a monopolist. The profit−maximizing output and price for the monopolist are

output​ = 62; price​ = $18.

When a monopolistically competitive firm cuts its price to increase its​ sales, it experiences a loss in revenue due to the

price effect.

Suppose the market for​ fast-food value meals is monopolistically​ competitive, with many restaurants selling their own brand of food. Assume the restaurants in the industry behave optimally by maximizing profit. The figure represents the market for one monopolistically competitive​ firm's value meals. How will this figure change as the market moves toward​ long-run equilibrium? In the long​ run,

the demand curve will shift to the left and become more elastic because the firms are currently making profit.

Why might a monopoly​ arise? One firm will be present when

the government blocks entry of more than one firm by granting a copyright

For a perfectly competitive​ firm, average revenue is equal to

the market price

Refer to the diagram to the right. Suppose the prevailing price is​ $20 and the firm is currently producing​ 1,350 units. In the long run​ equilibrium,

there will be fewer firms in the industry but total industry output increases.

Perfect price discrimination is

unlikely to occur because firms typically do not know how much each consumer is willing to pay.

Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.

wheat and corn are sold in perfectly competitive markets and Starbucks coffee and Gap clothing are sold in monopolistically competitive markets. Apples and oranges are sold in perfectly competitive markets and Maybelline cosmetics and Ralph Lauren cologne are sold in monopolistically competitive markets.

What is an​ oligopoly? An oligopoly is a market structure

where a small number of interdependent firms compete.

What is a sequential​ game? A sequential game is a game

where one firm acts first and then the other firms respond.

If the demand curve for a firm is downward ​- sloping, its marginal revenue curve

will lie below the demand curve.

Is a monopolistically competitive firm productively​ efficient?

​No, because it does not produce at minimum average total cost.

Alpha and Beta are the only firms selling gyros in the upscale town of Delphi. Each firm must decide on whether to offer a discount to students to compete for customers. If one firm offers a discount but the other does​ not, then the firm that offers the discount will increase its profit. The figure shows the payoff matrix for this game. Does Alpha have a dominant strategy and if​ so, what is​ it?

​Yes, Alpha should offer a student discount.

Assume that Lexus​ (L) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter​ BMW's entry into the luxury hybrid niche. Refer to the decision tree above. Should Lexus lower its price in order to deter​ BMW's entry into the luxury hybrid automobile​ market?

​Yes, it will drive BMW out of the market.

The figure shows the payoff matrix for Walmart and Target from every combination of pricing strategies for the popular PlayStation 4. At the start of the game each firm charges a low price and each earns a profit of​ $7,000. Is the current strategy in which each firm charges the low price and earns a profit of​ $7,000 a Nash​ equilibrium? If​ not, why and what is the Nash​ equilibrium?

​Yes, the current situation is a Nash equilibrium.

Three examples of oligopolies in the United States are industries that produce or sell

​computers ,athletic​ footware, and cigarettes.


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