PROBLEM SET #6
Q.1
You manage 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, you are 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 the Rothschild index is significantly greater than zero. Based on this information,
explain to your boss, which market structure best characterizes the industry in which you compete. Explain fully (4
lines)
Q.2
Your firm has $1 million in sales, a Lerner index of 0.65, and a marginal cost of $35, and competes against
1000 other firms in your relevant market
a.
What price should your firm charge its customers?
b.
by what factor does your firm mark up its price over marginal cost?
c.
do you think your firm enjoys much market power? Explain
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? (1 line )
Q.4
During a sales meeting 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. The manager received numerous stares after making the remarks. Why? (2 lines)
Q.5
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.6
True of False and why? “By definition a monopolist makes profits in the short run and long run” Explain fully and
illustrate with graphs. (3 lines + graph)
Q.7
Suppose you manage a firm in an industry that closely resembles that of perfect competition , Last week, demand
permanently rose in your industry. What happens to price, output and profits of the firms 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). (6 lines + graph)
Q.8
Why does the price increase when variable costs rise? (3 lines)
Q.9
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.10
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. (5 lines)
Q.11
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.12
You and your brother, Bob, inherit a firm with monopoly power. While you took Managerial Economics, Bob got a
degree in art, avoiding the Social Sciences. You are the CEO while Bob sits on the board and collects dividends as
a shareholder. In a private conversation, Bob says to you “ Look, I need more money to pay for my mansions,
yachts and art collections. Can’t you make more money for me? Look, our firm has monopoly power. Just raise
the price a few pennies and we will both make more money. I can then buy this other Monet I always wanted.
C’mon, forget social constraints when it’s so easy to make even more money when you have a monopoly!”. What
should you say to Bob?
Q.13
Students in the MBA program read in the newspaper that recruiting firms assign higher priority to “interpersonal
skills”, “ability to work in a team”, “communication skills” than to “critical thinking and analytical reasoning”
(which is ranked 4th). The students thus decided to take courses in Organizational Behavior, Leadership and so
forth. Are students doing the right thing to enhance their employment chances?
Calculations
Q.14
You are the manager of a monopolistically competitive firm, and your demand and cost functions are given by
P= 1000 – 10Q and TC = 10000-500Q
a.
b.
c.
d.
determine the profit-maximizing price and level of production
calculate the firm’s profits
what long-run adjustments should you expect? Explain.
Suppose your industry becomes a perfectly competitive one, how would that change your profit
maximizing output and price? Calculate