Q.1
Yen manages a firm that competes against many other firms in a highly competitive industry. Over the last decade, several firms have entered this industry and as a consequence, her company is earning a return on investment that roughly equals the interest rate. Furthermore, the four-firm concentration ratio and the
Herfindahl-Hirschman Index are both quite small but her Rothschild index is significantly greater than zero and her
Lerner Index is greater than zero but less than 1. Based on this information, which market structure best characterizes the industry in which Yen’s company competes. Explain fully (4 lines)
Q.2
In the 1990s, 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 1990s, 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. (4 lines)
Q.3
During a sales meeting, Fred, one of the regional managers of your firm, remarked that conduct variables such as industry concentration, market conditions and potential for entry, by rival firms were likely to hamper the firm's sales over the next year. Fred received numerous stares from several managers after making the remarks. Why?
(2 lines)
Q.4
True or False and why? “If it cost $20 on average to produce 100 units of x and it costs $20.20 on average to produce 101 units of x, then the marginal cost when producing unit #101 is 20 cents” (2 lines)
Q.5
Suppose Min manages a firm in an industry that closely resembles that of perfect competition , Last week, demand permanently rose in her industry. What happens to price, output and profits of Min’s firm in the short run? What would be the long run adjustment? Explain fully and illustrate with graphs assuming an initial situation of P=AC (breakeven point). (7 lines + graph)
Q.6
Why does the price increase when variable costs rise? (3 lines)
Q.7
You've been hired by an ‘unprofitable’ firm to determine whether it should shut down its operation. After carefully examining their books you concluded that the firm was making an economic profit of zero. You recommended that the firm remain in the industry. Explain to your employers why a firm remains in an industry in which it makes a zero economic profit. (3 lines)
Q.8
Firms like Pizza Hut sell pizza and other products that are differentiated in nature. While numerous pizza chains exist in most locations, the differentiated nature of these firms’ products permits them to charge prices above marginal cost. Given these observations, is the pizza industry most likely a monopoly, perfectly competitive, monopolistically competitive, or an oligopoly industry? Use the causal view of structure, conduct and performance to explain the role of differentiation in the market for pizza. Then apply the feedback critique to the role of differentiation in the industry. (7 lines)

Q.9
As the manager of a division of a major automaker, you overhead one of your workers make the following statement regarding the firm’s production plans: In order to maximize profits, it is essential that we operate at the minimum point of our average total cost curve”. Would you praise or chastise the employee? Explain (2 lines)
Q.10
Is it possible for a perfectly competitive firm to produce less output and charge higher prices than a monopoly?
Explain and illustrate on a graph. (6 lines + graph)
Q.11
Walt Disney has copyrighted the image and name “Mickey Mouse.” The total cost of producing Q units of Mickey related merchandise is: TC ( Q )
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10 Q . The annual demand for Mickey related merchandise is P
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10 , 010
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200 Q . Q is the number of units of Mickey related merchandise. The annual interest rate facing all agents in the economy is 8.75%. a.
How many units of Mickey related merchandise should Walt Disney produce? What price should
Disney charge for one unit of Mickey related merchandise? Clearly explain your reasoning. b.
What is total revenue from Mickey related merchandise to Disney? What are Disney’s annual profits from Mickey related merchandise? c.
Comcast wants to understand the value of the Mouse merchandising division. What is the value of the discounted present value annual profits from the Mickey related merchandise division? What is the most that Comcast should pay to buy just the Mouse merchandising division from Disney? d.
Suppose the Disney copyright of “Mickey Mouse” was due to expire by Mid October 2015. Describe the new market structure that would occur if Mickey Mouse entered the public domain, meaning anybody could use Mickey Mouse. What would be the new price of one unit of Mickey related merchandise? How many units of Mickey related merchandise would be sold by the Mickey related merchandise industry? e.
You, the manager of Disney, has just (mid October 2015, after your copyright has expired) received a cash offer from Comcast to buy just the Mouse merchandising division from Disney. How should you evaluate their offer? That is, what price should you target to receive from Comcast? Carefully, explain your reasoning.