Managerial Economics - Chapter 9 - Market Structure & Long-Run Equilibrium

Suppose that a new entry has decreased your demand elasticity from -2 to -3 (made demand more elastic) and that your price, before the new entry, was $20. You should adjust your price to $_____ due to the new entry and decreased demand elasticity.

$15 (P-MC) / P = 1 / |elesticity| MC:*20*(1 - 1/*2*)= 10 P: *10* / (1 - 1/*3*)= 15

Suppose that a new entry has decreased your demand elasticity from -4 to -5 (made demand more elastic) and that your price, before the new entry, was $20. You should adjust your price to$_____ due to the new entry and decreased demand elasticity.

$18.75

National Mfg. Co. (NMC) is a monopoly in the market. Suppose it can sell 4 units of its output at $5.00 per unit and 5 units of its output at $4.90 per unit. NMC will produce and sell the fifth unit if its marginal cost is

$4.50 or less.

Suppose workers prefer a certain amount of autonomy and flexibility in their job responsibilities. Job A and B are identical in all respects except Job A offers some autonomy and flexibility. Which of the following combinations of annual salaries would you predict?

$40,000 B: $50,000

AgCo sells corn in a perfectly competitive market. Say the current market price for a bushel of corn is $4.00. If AgCo prices at $4.10 per bushel for its corn,

AgCo will sell no bushels of corn.

You have recently been hired to advise the owners of Kenfield Insect Ltd. (KIL), which operates in a perfectly competitive industry. KIL is currently producing at a point where market price equals its marginal cost; KIL's total revenue is less than its total cost but exceeds its total variable cost. What advice should you provide KIL's owners?

Continue production in the short run to minimize losses, but exit the industry in the long run.

At a university faculty meeting, a proposal was made to increase the housing benefits for new faculty to keep pace with the high cost of housing. True or False: In the long run, this increase in housing benefits will make faculty positions more attractive than other jobs.

FALSE The indifference principle states that, in the long run, if an asset is mobile, then it will be indifferent about where it is used. That is, the asset will earn the same profit no matter where it goes. When applied to the labor market, the indifference principles implie that wages will adjust to restore equilibrium. In this case, an increase in some nonsalary benefit (such as housing benefits or health care benefits) makes the faculty position more attractive relative to other occupations. However, over the long run, as more people seek to become faculty members, the supply of labor in this occupation will increase, driving down wages in the occupation. At the same time, the supply of labor will decrease in other industries, as individuals in those industries (or individuals who would have entered those industries) seek to become faculty members. Thus, wages in other industries rise. The wages of new faculty members will continue to fall until faculty jobs are just as attractive as any other job. At this point, there is no incentive for individuals to continue to enter the college teaching profession, and the labor supply for faculty positions will stop increasing. Since the supply of labor has stopped increasing, wages stop decreasing. At this new equilibrium, despite the increase in benefits, wages have adjusted downward so that faculty jobs are equally attractive as other jobs.

Which of the following characteristics is most consistent with a perfectly competitive market?

Firms are able to enter and exit the market freely.

Which of the following types of firm is most likely to be a monopoly?

Local electricity provider

Merrimack Industries sells its output in a perfectly competitive market. Which of the following statements is true about Merrimack?

Merrimack will earn zero economic profits in long-run equilibrium.

Which of the following statements is true regarding the difference between monopoly prices and quantities compared to perfectly competitive prices and quantities?

Monopoly prices are higher than prices in perfect competition but quantities are lower than in perfect competition.

At a university faculty meeting, a proposal was made to increase health care benefits for new faculty to keep pace with the high cost of health care. True or False: In the long run, this increase in health care benefits will have no effect on the attractiveness of faculty positions compared to other jobs.

TRUE

At a university faculty meeting, a proposal was made to increase the housing benefits for new faculty to keep pace with the high cost of housing. True or False: In the long run, this increase in housing benefits will have no effect on the attractiveness of faculty positions compared to other jobs.

TRUE

Distributors of beer earn some monopoly profits in their local markets but see them slowly erode as substitutes enter the market. Suppose Nebraska has scheduled a vote on the legalization of marijuana. Additionally, suppose that marijuana and beer are *substitutes and that the legalization of marijuana would lead to a decrease* in the price of marijuana. Given the relationship between marijuana and beer, the legalization of marijuana would lead to _____ in demand for beer. Thus, distributors of beer would likely _____ the legalization of marijuana.

a decrease; oppose

Distributors of pipes earn some monopoly profits in their local markets but see them slowly erode as substitutes enter the market. Suppose Nebraska has scheduled a vote on the legalization of marijuana. Additionally, suppose that marijuana and pipes are *complements and that the legalization of marijuana would lead to a decrease* in the price of marijuana. Given the relationship between marijuana and pipes, the legalization of marijuana would lead to _____ in demand for pipes. Thus, distributors of pipes would likely _____ the legalization of marijuana.

an increase; support

Distributors of snack foods earn some monopoly profits in their local markets but see them slowly erode as substitutes enter the market. Suppose Nebraska has scheduled a vote on the legalization of marijuana. Additionally, suppose that marijuana and snack foods are *complements and that the legalization of marijuana would lead to a decrease* in the price of marijuana. Given the relationship between marijuana and snack foods, the legalization of marijuana would lead to a ______ in demand for snack foods. Thus, distributors of snack foods would likely _____ the legalization of marijuana.

an increase; support

Describe the difference in economic profit between a competitive firm and a monopolist in both the short and long run. Which should take longer to reach the long-run equilibrium? In the short run, both monopolists and competitive firms _____ earn positive economic profits. In the long run,_____ can earn a positive economic profit. True or False: The adjustment to long-run equilibrium occurs more quickly for monopolists than for competitive industries.

can; neither monopolists nor competitive firms FALSE (Competitive industries occur more quickly than monopolists)

Relative to managers in more *competitive/monopolistic* industries, managers in more *competitive/monopolistic* industries are more likely to spend their time on *pricing strategies rather than on reducing costs*.

competitive; monopolistic

Charlton Computer Company has a monopoly over the production of a specialized processor. It will be profitable for Charlton to increase production of its specialized processors as long as marginal cost

is less than marginal revenue.

Pat is the owner of United Local Supply, which makes zero economic profit. Pat is

making a return equal to his or her opportunity cost.

Relative to managers in more *competitive/monopolistic* Industries, managers in more *competitive/monopolistic* industries are more likely to spend their time on *reducing costs rather than on pricing strategies*.

monopolistic; competitive

If firms in a competitive industry begin to earn profit in the short run, new firms will enter. This will shift the industry

supply curve to the right, meaning market price will fall.

Imagine you are considering two potential summer jobs to makes some extra spending money - the first is working for a landscaping company and the second involves working for a swimming pool installation company. You are indifferent between the two jobs even though the swimming pool job pays $10 more hour. This must mean that

swimming pool construction provides a compensating wage differential of $10.

The main reason that a monopoly can earn positive economic profits in the long run while a perfectly competitive firm cannot is

there are barriers to entry in a monopoly market.