Transcript Ch17

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© 2013 Pearson
Monopolistic Competition
17
CHECKPOINTS
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Checkpoint 17.1
Problem 1
Problem 1
Problem 2
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Problem 3
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Problem 4
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In the news
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Checkpoint 17.2
Problem 2
Problem 3
In the news
Checkpoint 17.3
Problem 1
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Problem 2
Problem 3
In the news
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CHECKPOINT 17.1
Practice Problem 1
The table shows the total
revenue of the 50 firms in the
tattoo industry.
Calculate the four-firm
concentration ratio and the
HHI.
What is the market structure
of the tattoo industry?
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CHECKPOINT 17.1
Solution
The four-firm concentration
ratio is 46.6.
The market shares of the
four largest firms are 17.1,
12.4, 9.5, and 7.6.
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CHECKPOINT 17.1
The market shares from the
largest to the smallest are
17.1, 12.4, 9.5, 7.6, 1.9, and
0.8 percent.
HHI is the sum of the square
of the shares of 50 largest
firms.
HHI = 292.41 + 153.76 +
90.25 + 57.76 + (3.61 x 16) +
(0.64 x 30)
The HH1 is 671.14.
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CHECKPOINT 17.1
The four-firm concentration
ratio and the HH1 suggest that
the tattoo industry is an
example of monopolistic
competition unless there are
other reasons that would
make the concentration
measures unreliable guides.
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CHECKPOINT 17.1
Practice Problem 2
The table shows the total
revenue of the 50 firms in the
tattoo industry.
What would be the market
structure of the tattoo industry if
each of the 50 firms operated
in a different city and the cities
are spread across the nation?
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CHECKPOINT 17.1
Solution
If the 50 firms in the tattoo industry operate in different
cities spread across the nation, each firm is effectively
without competition.
The market might be a series of monopolies.
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CHECKPOINT 17.1
Study Plan Problem
If each firm in the tattoo industry
operated in a different city and the
cities are spread across the nation,
the market might _______.
A. be a series of monopolies
B. collapse because of lack of
competition
C. be monopolistic competition
D. be perfect competition
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Total revenue of the 50 firms
in the tattoo industry.
CHECKPOINT 17.1
Practice Problem 3
The table shows the total
revenue of the 50 firms in the
tattoo industry.
What additional information
would you need about the
tattoo industry to be sure that
it is an example of
monopolistic competition?
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CHECKPOINT 17.1
Solution
The additional information needed is information about
product differentiation; competition on price, quality, and
marketing; and evidence of low barriers to the entry of
new firms.
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CHECKPOINT 17.1
Study Plan Problem
What additional information would
you need about the tattoo industry to
be sure that it is an example of
monopolistic competition?
A. Barriers to entry
B. Competition on quality and
marketing
C. Competition on price
D. Product differentiation
E. All of the above
© 2013 Pearson
Total revenue of the 50 firms
in the tattoo industry.
CHECKPOINT 17.1
Practice Problem 4
The table shows the total
revenue of the 50 firms in
the tattoo industry.
Suppose that a new tattoo
technology makes it easier
for anyone to enter the
tattoo industry.
How might the market
structure of the tattoo
industry change?
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CHECKPOINT 17.1
Solution
This new tattoo technology would most likely lead to the
entry of more firms, greater product differentiation, and
more competition.
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CHECKPOINT 17.1
Study Plan Problem
Suppose that a new tattoo technology
makes it easier for anyone to enter the
tattoo industry.
You would expect _______ in product
differentiation and ______competition on
product quality, price, and marketing.
A.
B.
C.
D.
E.
no change; less
an increase; more
a decrease; more
an increase; no change
a decrease; less
© 2013 Pearson
Total revenue of the 50 firms
in the tattoo industry.
CHECKPOINT 17.1
In the news
Is a prepaid phone plan right for you?
Cell-phone providers are offering new no-contract plans.
For example, Tmobile’s “flexpay” plans allow users to buy
monthly service; Boost Mobile’s no-contract plan has use;
and Virgin Mobile’s plan has unlimited calling for $49.99 a
month. All providers are actively marketing their nocontract plans.
Source: Wall Street Journal, April 22, 2009
In what type of market are cell-phone plans sold? Explain
your answer.
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CHECKPOINT 17.1
Solution
The market structure is monopolistic competition.
The number of cell-phone providers is large, and they offer
differentiated services.
No firm dominates the market and the firms compete on
quality, price, and marketing.
New cell-phone providers can enter the market with their
own plan.
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CHECKPOINT 17.2
Practice Problem 1
Natti has a website at which
people can design and buy a
pair of sunglasses.
Natti pays $4,000 a month for
her Web server and Internet.
The glasses are made by a firm,
which Natti pays $50 a pair.
Natti has no other costs.
Calculate Natti’s profitmaximizing output, price, and
economic profit.
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The demand schedule for
Natti’s sunglasses.
CHECKPOINT 17.2
Solution
Marginal cost, MC, is $50 a
pair—the price that Natti pays
her supplier of glasses.
The figure shows the demand,
marginal revenue, and
marginal cost curves.
Profit is maximized when
MC = MR and Natti sells 100
pairs a month.
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CHECKPOINT 17.2
The price is $150 a pair, and
average total cost, ATC, is
$90 a pair—the sum of $50
marginal (and average
variable) cost and $40
average fixed cost.
Economic profit is $60 a pair
on 100 pairs a month, so
economic profit is $6,000 a
month.
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CHECKPOINT 17.2
Practice Problem 2
Natti has a website at which
people can design and buy a
pair of sunglasses.
Natti pays $4,000 a month for
her Web server and Internet.
The glasses are made by a firm,
which Natti pays $50 a pair.
Natti has no other costs.
Do you expect other firms to
enter the industry?
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The demand schedule for
Natti’s sunglasses.
CHECKPOINT 17.2
Solution
Natti is making an economic
profit, so other firms have an
incentive to enter the industry
and will do so.
© 2013 Pearson
CHECKPOINT 17.2
Study Plan Problem
Natti has a website at which
people can design and buy a
pair of sunglasses.
Natti pays $4,000 a month for
her Web server and Internet.
The glasses are made by a firm,
which Natti pays $50 a pair.
Natti has no other costs.
© 2013 Pearson
The demand schedule for
Natti’s sunglasses.
CHECKPOINT 17.2
Do you expect other firms to enter
the Web sunglasses business?
A. Other firms have no incentive to enter
the market.
B. Other firms have an incentive to enter
the market and will do so.
C. Other firms have an incentive to enter
the market but barriers prevent them.
D. Some firms will exit the market.
E. As other firms enter, Natti will exit the
market.
© 2013 Pearson
The demand schedule for
Natti’s sunglasses.
CHECKPOINT 17.2
Practice Problem 3
Natti has a website at which
people can design and buy a
pair of sunglasses.
Natti pays $4,000 a month for
her Web server and Internet.
The glasses are made by a
firm, which Natti pays $50 a
pair. Natti has no other costs.
What happens to the demand
for Natti’s sunglasses and
Natti’s profit in the long run?
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The demand schedule for
Natti’s sunglasses.
CHECKPOINT 17.2
Solution
Because Natti’s is making a positive economic profit, firms
will enter the market and the demand for Natti’s
sunglasses will decrease.
The demand curve for Natti’s sunglasses will shift leftward.
As the demand for Natti’s sunglasses decreases, her
economic profit also decreases.
In long-run equilibrium, Natti’s makes zero economic
profit.
© 2013 Pearson
CHECKPOINT 17.2
Study Plan Problem
Natti has a website at which
people can design and buy a
pair of sunglasses.
Natti pays $4,000 a month for
her Web server and Internet.
The glasses are made by a firm,
which Natti pays $50 a pair.
Natti has no other costs.
© 2013 Pearson
The demand schedule for
Natti’s sunglasses.
CHECKPOINT 17.2
In the long run, the demand for
Natti’s sunglasses
_______and in long-run
equilibrium, Natti’s _______.
A. increases; economic profit
increases
B. decreases; shuts down
C. decreases; makes zero
economic profit
D. decreases; incurs an economic
loss
© 2013 Pearson
The demand schedule for
Natti’s sunglasses.
CHECKPOINT 17.2
In the news
Condé Nast shuts down Portfolio
Condé Nast Publications launched its monthly business
magazine Portfolio less than two years ago. In late 2008,
Condé Nast cut its payroll and advertising budgets by 5
percent across all of its titles. Portfolio was hit with the
biggest cuts. Recently, Condé Nast shut down Portfolio.
Source: Wall Street Journal, April 28, 2009
Explain the effects of the payroll and advertising budgets
cuts on Condé Nast loss in the short run.
Why did Condé Nast shut down Portfolio?
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CHECKPOINT 17.2
Solution
Payroll and advertising budgets are variable costs, so a
cut in these costs shifts the ATC and MC curves
downward.
With no change in the prices of the magazines, Condé
Nast’s economic loss decreased.
Condé Nast shut down Portfolio because its loss from
Portfolio exceeded its total fixed cost and the company
expected the loss to continue in the coming year.
© 2013 Pearson
CHECKPOINT 17.3
Practice Problem 1
Bianca bakes delicious cookies. Her total fixed cost is $40
a day, and her average variable cost is $1 a bag.
Few people know about Bianca’s Cookies, and she
maximizes profit by selling 10 bags a day for $5 a bag.
Bianca thinks that if she spends $50 a day on advertising,
she can increase her market share and sell 25 bags a day
for $5 a bag.
If Bianca’s belief about the effect of advertising is correct,
can she increase her economic profit by advertising.
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CHECKPOINT 17.3
Solution
With no advertising, Bianca’s total revenue is $50 (10
bags at $5 a bag) and her total cost is $50 (the sum of $40
total fixed cost and $10 total variable cost).
So her economic profit is zero.
With $50 a day advertising expenditure, Bianca has a total
revenue of $125 (25 bags at $5 a bag) and total cost of
$115 (total fixed cost is $90, and total variable cost is
$25).
Her economic profit with no price change is $10, so
Bianca can increase her economic profit by advertising.
© 2013 Pearson
CHECKPOINT 17.3
Study Plan Problem
Bianca bakes delicious cookies: TFC is $40 a day, AVC is
$1 a bag and she maximizes profit by selling 10 bags a
day for $5 a bag.
Bianca thinks that if she spends $50 a day on advertising,
she can sell 25 bags a day for $5 a bag. If Bianca’s belief
about the effect of advertising is correct, she ________.
A. cannot increase her economic profit by advertising
because advertising increases her average total cost
B. cannot increase her economic profit by advertising
because advertising increases her total cost
C. can increase her economic profit by advertising only if
she raises the price of her cookies
D. can increase her economic profit by advertising
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CHECKPOINT 17.3
Practice Problem 2
Bianca bakes delicious cookies. Her total fixed cost is $40 a
day, and her average variable cost is $1 a bag.
Few people know about Bianca’s Cookies, and she
maximizes profit by selling 10 bags a day for $5 a bag.
Bianca thinks that if she spends $50 a day on advertising,
she can increase her market share and sell 25 bags a day
for $5 a bag.
If Bianca advertises, will her average total cost increase or
decrease at the quantity produced?
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CHECKPOINT 17.3
Solution
If Bianca advertises, her average total cost will decrease.
With no advertising, her average total cost is $5 a bag
($50 a bag ÷ 10 bags).
With advertising, her average total cost is $4.60 a bag|
($115 a bag ÷ 25 bags).
© 2013 Pearson
CHECKPOINT 17.3
Practice Problem 3
Bianca bakes delicious cookies. Her total fixed cost is $40 a
day, and her average variable cost is $1 a bag.
Few people know about Bianca’s Cookies, and she
maximizes profit by selling 10 bags a day for $5 a bag.
Bianca thinks that if she spends $50 a day on advertising,
she can increase her market share and sell 25 bags a day
for $5 a bag.
If Bianca advertises, will she continue to sell her cookies for
$5 a bag or will she raise or lower her price?
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CHECKPOINT 17.3
Solution
We can’t say if Bianca will continue to sell her cookies for
$5 a bag.
Her profit-maximizing price will depend on how her
demand curve shifts when she advertises.
Advertising costs are fixed costs, so they don’t change
marginal cost, which remains at $1 a bag.
Bianca will sell the profit-maximizing quantity (the quantity
at which marginal revenue equals marginal cost) for the
highest price she can charge (read from the demand
curve) for the quantity produced.
© 2013 Pearson
CHECKPOINT 17.3
Study Plan Problem
Bianca bakes delicious cookies: TFC is $40 a day, AVC is
$1 a bag and she maximizes profit by selling 10 bags a
day for $5 a bag.
Bianca thinks that if she spends $50 a day on advertising,
she can sell 25 bags a day for $5 a bag. If Bianca’s
advertises, at what price will she sell her cookies?
A. $5 a bag
B. a price above $5 a bag
C. cannot say if the price will be above, equal to, or below
$5 a bag, depending on the demand for her cookies
D. a price below $5 a bag
© 2013 Pearson
CHECKPOINT 17.3
In the news
Purex tackles tough market, using new spin
Americans like to pour their own laundry detergent, but Dial
plans to launch Purex Complete, a “3-in-1” laundry sheet
embedded with detergent, fabric softener, and antistatic
agents and in an easy to use container. Only about 50
percent of consumers currently use softener and antistatic
agents (laundry additives). Dial will spend $50 million
marketing Purex Complete.
Source: Wall Street Journal, April 28, 2009
Why create a new laundry detergent when there are so
many? What “new spin” would you stress in the marketing
campaign?
© 2013 Pearson
CHECKPOINT 17.3
Solution
A new product is developed and launched if the marginal
benefit from its development exceeds the marginal cost of
its development.
Because many consumers seem to find separate laundry
additives inconvenient, the marketing campaign should
target these people and stress the convenience feature.
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