Transcript ECON 1001

ECON 1001
Tutorial 9
Q1) Market power measures the firm’s
ability to
A)
B)
C)
D)
E)
Under cut its competitors.
Resist union wage demands.
Raise its price without losing all of its sales.
Influence the price its competitors charge.
Force consumers to pay prices higher than
their reservation prices.
Ans:C
• This is the way that economists define
what market power is.
– A firm has more market power if it is able to
raise the price of its product more and not
losing as many customers.
• Firms in a perfectly competitive market do
not have any market power at all.
– If a firm raises its price in a perfectly
competitive market, all its customers will
switch to another firm which is selling the
same product at the market price.
• A firm which is a monopolist has the most
market power.
• Because it is the only firm selling a certain kind
of product, if it raises the price, there will still be
some customers staying behind.
• Of course, that does not mean when a firm has
market power, it will not lose any sales at all.
When price rises, quantity demanded inevitably
drops (law of demand).
• It just mean the firm will not lose all its
customers, unlike in the case of perfect
competition.
Q2) Suppose a firm increases its labour
usage and office space (the only inputs
used) by 10% and observes a 13%
increase in output. The firm has
A) Increasing returns to scale.
B) Constant returns to scale.
C) Violated the law of diminishing marginal
returns.
D) Increased its average costs.
E) Reduced its total costs.
Ans:A
• A firm is said to have constant returns to
scale when an x% increase in inputs
results in an x% rise in output.
• A firm is said to have decreasing returns to
scale when an x% increase in inputs leads
to a less than x% rise in output.
• A firm is said to have increasing returns to
scale when an x% increase in inputs
causes a more than x% rise in output.
Q3)Imagine that you are an entrepreneur, making
designer T-shirts in your garage. Your
accountant has estimated that your firm’s total
costs are TC = 300+10Q.
As you increase production of T-shirts, your
AFC ? and your marginal costs ? .
A)
B)
C)
D)
E)
↓; ↑
↑; ↓
Same, same
Same, ↑
↓; same
Ans: E
• Let’s look at MC first.
• The TC function is TC=300+10Q.
• MC(Q*)
= TC(Q*+1) – TC(Q*)
= {300 + 10(Q*+1)} - {300 + 10(Q*)}
= 300 + 10Q*+10 - 300 - 10Q*
=10
• This is the MC of producing one more unit of the
good.
• Since MC is a constant on the cost function, it
remains the same and does not change with Q.
• AFC = Fixed Cost / Q
• Total Fixed Cost is 300.
• As Q gets larger, AFC gets smaller.
• Mathematically, as the value of the
denominator gets larger, the value of the
whole fraction becomes smaller.
• Hence, the answer is E.
Q4)Suppose that there are just 2 firms in a small
market.
Acme:
Generic:
TC=100+3Q
TC=500+3Q
Which statement is true?
A)
B)
C)
D)
E)
Acme will always have lower MC than Generic.
Acme and Generic have equal MC.
MC at each firm will depend on the output of the firms.
Acme and Generic will always have the same ATC.
Acme has greater economies of scale than does
Generic.
Ans: B
• A Total Cost Function with constant MC
generally takes a form like this:
TC = Fixed Cost + MC ∙ Q
• As the 2 firms have different Fixed Costs,
their ATC will NOT be the same.
• Hence, option D is wrong.
• Both firms’ MC is $30 regardless of how
many units of output are produced.
• Therefore, Options A and C is also
incorrect.
• And that makes Option B the correct
answer. According to the firms’ cost
functions, MCAcme = MCGeneric
Q5) To profit maximise, the firm will choose
to produce ? Units and charge a
price of ? .
A)
B)
C)
D)
E)
3.2;
7;
7;
3.5;
3.5;
Ans:
$33.50
$19.30
$5
$5
$22.50
E
• Is the firm a price
setter or a price
taker?
P
• Price setter
(monopolist)
• Therefore, we can
simplify the
diagram into this.
MC
MR
D
Q
• The π-max quantity
is where MR=MC.
P
• Therefore, Q*=3.5.
• A monopolist will
charge the
reservation price of
Q* according to the
Demand schedule.
• Therefore, Price will
be $22.50 (E)
22.50
MC
MR
3.5
D
Q
Q6) The socially efficient Price and Output
combination is ? .
A)
B)
C)
D)
E)
$5;
$5;
$19.30;
$22.50;
$33.50;
Ans:
7
3.5
7
3.5
3.5
A
• The Socially
Efficient point is
where MC meets
Demand.
• This is the point
where all potential
surpluses have
been extracted.
P
MC
5
MR
D
7
• The respective P
and Q are $5 and 7.
Q
Q7) The difference between CS given the
monopoly market structure and CS with
socially efficient quantity is the
area ? .
A)
B)
C)
D)
E)
LEI
GCEI
0GI
GJI
GCEL
Ans:B
• The Socially Eff.
Point is where MC
meets D.
• The CS when it is
socially efficient is
area GJI.
Price
J
MC
I
G
MR
D
Quantity
• But if it is a monopoly,
P will be higher and
Q will be lower.
Price
J
• Q is determined by
MR=MC
MC
C
E
I
• P is the
corresponding
reservation price on
the Demand curve.
G
MR
A
D
Quantity
• CS under
monopoly is area
CJE.
• The difference
between CS
(monopoly) and CS
(social efficient) is
area GCEI.
Price
J
MC
C
E
I
G
MR
A
D
Quantity
Q8) Suppose a monopolist produces Good X. He sells one
version of X to consumers and another version to
businesses. The MC of the consumer version is $5.
MC of the business version is $5.75. If resale is
impossible, one can infer that
A)
B)
C)
D)
E)
The monopolist will charge 2 different prices and is not practising
price discrimination.
The monopolist will charge a uniform price to both consumers and
businesses.
The monopolist will charge 2 different prices and is perfectly price
discriminating.
The monopolist will charge 2 different prices and is imperfectly
price discriminating.
The monopolist will earn more money from sales to business than
to consumers.
Ans: A
• Recall that Price Discrimination is…
• A way to reduce inefficiency in a monopoly,
and also a way for monopolist to extract
consumer surplus.
• The practice of charging different buyers
different prices for essentially the same
good or service.
• Is the monopolist in this question charging
different buyers different prices?
• Yes!
• Are the buyers buying the same good?
• No!
• The versions in the 2 markets are different. The
MCs of production of the 2 versions are also
different.
• Hence, the monopolist is not practising price
discrimination. (A)
Q9)Which of the following situations will come
closest to perfect price discrimination?
A) Charging a different price on different days.
B) Charging a different price at the end of the
year.
C) Negotiating a price with a group of customers.
D) Negotiating a price with each individual
consumer.
E) Offering instant, in store rebates.
Ans: D
• Perfect price discrimination is also called
‘First Degree Price Discrimination’.
• It is the practice of charging each
customer a different price.
• The price charged is the maximum or
reservation price the customer is willing to
pay.
• In view of this, Option D is the closest to
perfect price discrimination.
Q10) In its efforts to keep medical costs down, the
government has decided to impose a $15 price ceiling
on a weekly dose of this drug. What is likely to happen?
A)
The firm will produce 400 doses per week causing
excess supply of this drug on the market.
B) This drug will disappear from the market.
C) The firm will produce 325 doses per week, just
meeting consumer demand.
D) The firm will produce 200 doses per week, the quantity
at which price equals MC.
E) New firms will enter this market due to the high
quantity demanded at $15.
Ans: B
• As there is a price ceiling of $15, the MR
of selling a dose is no longer the original
MR that is derived from the Demand curve.
• The MR is now $15
• Therefore, if the manufacturer is to
produce anything, the profit-max quantity
would be where MC meets the new MR
($15).
• Price ceiling is $15.
• Profit-max quantity is
220.
P
D
• However, the AC of
each dose is $45.
• Therefore, the
producer will be
making a loss when
there is a price ceiling.
• It will choose not to
produce at all. (B)
$45
ATC
$15
MC
220
Q