PROBLEM SET #5
1 - 4 line answers + graphs if you wan
Q.1
During a sales meeting one of the regional managers of Toga Industries remarked that structural variables such as
advertising and R&D activities by rival firms were likely to hamper the firm's sales over the next year. The
manager received numerous stares after making the remarks. Why?
Q.2
In the 1970s, 3 firms supply fitness shoes in the United States (fictitious), Nike, Reebok and Adidas. There was a
bit of difference in the quality of shoes produced by these firms, so it was not surprising that Nike’s market share
was 70%. The own price elasticity of demand for Nike shoes was -4.0 and the market elasticity of demand was 3.75. Suppose that in the 1970s, the average retail price of a fitness shoe was $45 and that Nike’s marginal cost
was $20 per shoe, based on this information, discuss the industry concentration, demand and market conditions
and the pricing behavior of Nike in the 1990s.
Q.3
Why do firms enter a market in a perfectly competitive industry when they know that economic profit is zero in
the long run?
Q.4
Why does maximum profit imply MR=MC
Q.5
Is it possible for a monopoly to produce more output and charge less price than a perfectly competitive industry?
Explain
Q.6
Heard on the 1st floor of Building 250 “ If he so wishes, Saleh, the owner of Kabsa Inc, a monopoly restaurant in
Nanaimo that sells Al Kabsa, can raise the price anytime and make more profits. Why? A monopolist controls the
market and faces a downward-sloping demand curve. There are no close substitutes for his product. So we
should be thankful that Saleh does not increase the price when he could do so.” Do you agree? Why or why not?
Q.7
Suppose you are an investor who may obtain 10% in an investment. You can borrow money at 4% for this or any
other investment of equal risk. Are you economically gaining 6% on your investment?
Q.8
Heard in a meeting: “Competition promotes greed and mistrust, and greed results in shoddy products and high
prices. We need more collaboration and less competition in business” Do you agree? Why or why not?
Q.9
True of False and why? “In the long run, a monopolist produces where average cost is lowest”
Q.10
Suppose that a sales tax is imposed on all producers in a perfectly competitive industry. How would this affect
output and the market price? When is the burden of a sales tax heavier on customers? (4 lines)
Q.11
Why does the price increase when variable costs rise? Do variable costs and price rise by the same proportion?
Q.12
Suppose that fixed costs decrease for each present and potential producer in a perfectly competitive industry.
How would this affect the output and market price . Illustrate with a graph
Q.13
The CEO of your firm interrupts one of your managers who is briefly explaining what might happen in the case of a
perfectly competitive industry, and says “I don’t care about this extreme idealistic ‘perfectly competitive market’
analysis. There is no perfect competition in any industry. Why use such an extreme ‘perfect’ case when it does
not fit the facts?”. What would you say on behalf of this poor victim, the manager?
Q.14
Omega Travel competes in the highly competitive market for travel. Consumers know that Omega has the best
agents in the industry and offers superior service. Nonetheless, Omega earns zero economic profits because
numerous competitors have entered the market over the last few years. Based on this information, does Omega
operate in a perfectly competitive market? Why or why not?