Economics Study Set 17

Business

Quiz 11 :

Monopoly

Quiz 11 :

Monopoly

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If competitive firms earn zero economic profits, explain why anyone would invest money in them. ( Hint: What is the role of the opportunity cost of capital in economic profit )
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One would invest in the competitive firm considering the future benefits though it is making zero economic profits.
Present profitability is not considered by the investors while taking investment decisions. Future anticipations play an important role while determining the level of investment.
Opportunity cost plays an important role since it is evaluated by the investors while investing in a competitive firm. Opportunity cost capital would be less in the present than the value of it in the future.

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It can be proved that, other things being equal, under price discrimination the price charged to some customer group will be higher the less elastic the demand curve of that group is. Why is that result plausible
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If the demand is relatively inelastic, then a monopolist can charge higher price. For example, there are two groups X and Y. group X has the elastic demand and the group Y has inelastic demand.
The demand curve of the group which has inelastic demand would be relatively steeper, so the price would be determined at higher level.
On the other hand, the demand curve of the group which has elastic demand would be relatively flatter, so the price would be determined at lower level. Higher price of the product yields higher revenue for the monopolist.
Thus, under price discrimination, the price charged to the customers having inelastic demand would relatively higher than the customers having elastic demand.

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The following are the demand and total cost schedules for Company Town Water, a local monopoly: img How much output will Company Town Water produce, and what price will it charge Will it earn a profit How much ( Hint: First compute the firm's MR and MC schedules.)
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The profit of a firm can be calculated by considering total cost and total revenue. The following is a table in which marginal revenue and marginal cost is calculated.
img The above table indicates that the marginal revenue equals marginal cost at the level of 150,000 gallons. A firm can maximize its profit by producing at the level where marginal cost equals marginal revenue. Thus, Company Town Water produces 150,000 gallons and charges $0.22 per gallon.
A firm will earn profit by producing 150,000 gallons because at this level total revenue greater than that the total cost. Total revenue is $33,000 and total cost is $22,000. Thus, Company Town Water earns profit of $11,000
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A firm cannot break even by charging uniform (nondiscriminatory) prices, but with price discrimination it can earn a small profit. Explain why in this case consumers must be better off if the firm is permitted to charge discriminatory prices.
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A monopoly sells Frisbees to two customer groups. Group A has a downward-sloping straight-line demand curve, whereas the demand curve for Group B is infinitely elastic. Draw the graph determining the profit-maximizing discriminatory prices and sales to the two groups. What will be the price of Frisbees to Group B Why How is the price to Group A determined
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General Motors declared bankruptcy in 2009. If it goes out of business altogether, why might that not reduce the competition facing rival automaker Ford ( Hint: At what price would the assets of the bankrupt companies be offered for sale )
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What does your answer to the previous question tell you about the ease or difficulty of entry into the automobile industry
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Show from the table in Test Yourself Question 2 that for the water company, marginal revenue (per 50,000-gallon unit) is always less than price.
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Use Figure 2 to show that Adam Smith was wrong when he claimed that a monopoly would always charge "the highest price which can be got."
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Which of the following industries are pure monopolies a. The only supplier of heating fuel in an isolated town b. The only supplier of IBM notebook computers in town c. The only supplier of digital cameras Explain your answers.
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Suppose that a monopoly industry produces less output than a similar competitive industry. Discuss why this may be considered socially undesirable. Is this because it is always socially beneficial to produce more of some product
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Suppose that a tax of $28 is levied on each item sold by a monopolist, and as a result, it decides to raise its price by exactly $28. Why might this decision be against its own best interests
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