Managerial Economics Study Set 10

Business

Quiz 9 :

Pricing and Output Decision: Monopolistic Competition and Oligopoly

Quiz 9 :

Pricing and Output Decision: Monopolistic Competition and Oligopoly

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A phenomenon in the retail merchandising of food and clothing in the United States and the United Kingdom is the growing popularity of private-label (also called store-brand) products. These products are priced at a lower level than the premium national brands. Use the concepts of price elasticity and relevant cost to explain the profitability of these products from the point of view of a. The retail stores that sell these private-label products. b. The manufacturers of these private-label products. If you were the manager of a national premium brand, what would you do to fight the growingcompetition of private labels
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a. If the price elastic is greater than one, retails stores will benefit by reducing price. In this case, total revenue will increase as price decrease. Firm's profit will also increase, if cost of production remains same.
The revenue area OQ 2 BP 2 is greater than the revenue area OQ 1 AP 1
img If the price elastic is equal to one, the retails stores has maximize the total revenue. Any change in price from that level of price will only leads to lower revenue.
If the price elastic is lesser than one, retails stores will incur losses by reducing the price. In this case, total revenue will decreased as price decrease. So, firm's profit will also decrease.
b. If manufacturers of these private-label products have relevant cost less than that of national brands, then the price of private-label are lesser than that of national brands. Thus, manufacturers will earn more profit.
If manufacturers of these private-label products have relevant cost equal to that of national brands, the price of private-label will then equal to national brands. Thus, there will not be any incentive earn extra profit.
If manufacturers of these private-label products have relevant cost higher than that of national brands, the price of private-label will be higher than national brands. Thus, manufacturers will incur loss.
If I were the manager of a national premium brand, first I would try to reduce the cost of the product by introducing use hi-tech machine and skilled labor force.
Second, to increase demand for the product demand I would try to produce better quality good and give combo offer with the product.

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A group of five students has decided to form a company to publish a guide to eating establishments located in the vicinity of all major college and university campuses in the state. In planning for an initial publication of 6,000 copies, they estimated the cost of producing this book to be as follows: img By engaging in this business, the students realized that they would have to give up their summer jobs. Each student made an average of $4,000 per summer. However, they believed they could keep expenses down by doing much of the research for the book by themselves with no immediate compensation. They decided to set the retail price of the book at $12.50 per copy. Allowing for the 20 percent discount that retail stores in their state generally required, the students anticipated a per-unit revenue of about $10.00. The director of the campus bookstore advised them that their retail price was far too high, and that a price of about $8.75 would be more reasonable for a publication of this kind. One of the students, who was a math and statistics major, asked the bookstore manager to provide her with historical data on sales and prices of similar books. From these data, she estimated the demand for books of this kind to be Q = 18,500 - 1,000 P where Q = Number of books sold per year P = Retail price of the books a. Construct a numerical table for the retail demand curve, and plot the numbers on a graph. Calculate the elasticity of demand for the interval between $12.50 and $8.00. b. Do you think the students should follow the store manager's advice and price their book at $8.75 Explain. If you do not agree with this price, what would be the optimal price of the book Explain. c. Assuming the students decide to charge the optimal price, do you think they should proceed with this venture Explain. d. Assuming the student's demand equation is accurate, offer some possible reasons why the bookstore manager would want to sell the book at the lower price of $8.75
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Given the demand equation:
img a. The demand schedule is below
img Price elasticity of demand for interval between $12.50 and $08.00 is less than one.
img b. Students should not follow the advice of the store manager because the price elasticity is less than one. The percentage decrease in price is not followed by much decrease in demand. Thus they can continue to charge high price and earn higher profits. The optimal price of the book would be the one that covers all the cost of production and gives maximum profits. The optimum price where total revenue is maximum i.e. $9
img c. If students decide to charge optimum price, then they should not continue this venture because they have decided to produce 6000 books but at $9 quantity of 9500 should be produced to earn maximum revenue and cover all the cost.
d. The store manager advised them to sell at $8.75 because that might be the average price at which books are selling in the store. He advised to reduce price to increase the demand.

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Explain the key difference between perfect competition and monopolistic competition.
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Perfect competition is the market structure where there are many sellers and buyers, sellers sell a homogeneous good, buyers and sellers have all relevant information, entry into and exit from the market are easy. Monopolistic competition is the market structure where many producers sell products that are differentiated from one another.
Monopolistic competition differs from the perfect competition. These are the differences:-
1) Monopolistic firms have some market power while perfectly competitive firms have not the market power.
2) Product that is produced by monopolistic firms is not identical while perfectly firms produce homogeneous good.
3) Non-price competition exists in monopolistic competition while prefect competition does not have it.

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In certain industries, firms buy their most important inputs in markets that are close to perfectly competitive and sell their output in imperfectly competitive markets. Cite as many examples as you can of these types of businesses. Explain why the profits of such firms tend to increase when there is an excess supply of the inputs they use in their production process.
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Redo Problem 7a to e with an initial inverse demand given by: P = 45 - Q
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Use the same data presented in Problem 1 to answer the following questions: a. Explain the impact on the optimal price of designating the "miscellaneous" cost item as fixed versus variable. ( Hint: Do the pricing analysis assuming miscellaneous is a fixed cost and compare it with an analysis that assumes it is a variable cost.) b. Under what circumstances do you think the average variable cost would increase (as is generally expected in the economic analysis of cost) Do you think the law of diminishing returns would play a role in increasing AVC Explain. c. Under what circumstances do you think the average variable cost would decrease Explain.
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Briefly explain the structure-conduct-performance approach to the study of industrial economics.
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How does one determine whether a market is oligopolistic Is it important for managers to recognize the existence of oligopolistic competitors in the markets in which their companies operate Explain.
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A firm has the following short-run inverse demand and cost schedules for a particular product: P = 45 - 0.2 Q TC = 500 + 5 Q a. At what price should this firm sell its product b. If this is a monopolistically competitive firm, what do you think would happen as the firm moves toward the long run Explain. c. Suppose in the long run, that inverse demand shifts to P = 25 - 0.2 Q. What should the firm do Explain. Provide graphs for both the short-run and long-run scenarios. Make sure your graphs include demand, MR, MC, and AC. d. Suppose, in the long run, that inverse demand shifts to P = 45 - 0.8 Q. What should the firm do Explain, and provide graphs for both the short-run and long-run scenarios. Make sure your graphs include demand, MR, MC, and AC. e. Does the demand in part c or part d represent a change in market share for the representative firm as a result of the entry or exit suggested in part b
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Suppose three firms face the same total market demand for their product. This demand is: img Suppose further that all three firms are selling their product for $60 and each has about one-third of the total market. One of the firms, in an attempt to gain market share at the expense of the others, drops its price to $50. The other two quickly follow suit. a. What impact would this move have on the profits of all three firms Explain your reasoning. b. Would these firms have been better off in terms of profit if they all had raised the price to $70 Explain.
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Why do oligopolists often rely on a price leader to raise the market price of a product.
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Indicate whether each of the following statements is true or false, and explain why. a. A competitive firm that is incurring a loss should immediately cease operations. b. A pure monopoly does not have to worry about suffering losses because it has the power to set its prices at any level it desires. c. In the long run, firms operating in perfect competition and monopolistic competition will tend to earn normal profits. d. Assuming a linear demand curve, a firm that wants to maximize its revenue will charge a lower price than a firm that wants to maximize its profits. e. In an oligopoly, the firm that has the largest market share will also be the price leader. f. The demand curve facing a firm in a monopolistically competitive market is more elastic than one facing a pure monopoly.
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Two natural boundaries to rival reaction are for the rival to not react (or not follow) a firm's actions or to follow a firm's actions. Consider pricing in a differentiated product market. If all firms in the oligopolistic market follow each other's price changes, then the size of the market may change, but the market share controlled by each firm would not appreciably change. On the other hand, if other firms do not follow a price change, then the market share controlled by the firm that has changed its price will change. Suppose we denote market demand by "D market,"; demand given price matching behavior by "d follower"; and demand given price changes are not matched by "d nonfollower," similar to Figure Two panels are shown with these three demand curves. img Each panel has the same market and follower demand. Based on these panels, answer the following questions. a. What market share does the firm depicted have along the follower demand curve b. What is this firm's current price c. Which panel depicts a market in which niche players have a stronger brand identity and are able to maintain at least some of their market despite other firms dropping their price Answer this problem by making specific reference to what happens in the face of price decreases in each panel. Figure Demand Curves for an Oligopoly Considering a Price Increase/Decrease img
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Professor Michael Porter's generic strategy options for competing are the differentiation approach and the cost leadership approach. The first involves competing by having a better product and the second by having a lower cost than one's competitors. Relate this strategy to the monopolistically competitive model presented in this chapter. In particular, use Figure 9.1 to explain the rationale for Porter's generic strategies. Figure Monopolistic Competition. The view of a representative firm in a differentiated product market with free entry and exit img
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In the short run, firms that seek to maximize their market share will tend to charge a lower price for their products than firms that seek to maximize their profit. Do you agree with this statement Explain.
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In the following list are a number of well-known companies and the products that they sell. Which of the four types of markets (perfect competition, monopoly, monopolistic competition, and oligopoly) best characterizes the markets in which they compete Explain why. a. McDonald's-hamburgers b. ExxonMobil-gasoline c. Dell-personal computers d. Heinz-ketchup e. Procter Gamble-disposable diapers f. Starbucks-gourmet coffee g. Domino's-pizza h. Intel-computer chip for the PC
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Define mutual interdependence.
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Assume firms in the short run are earning above-normal profits. Explain what will happen to these profits in the long run for the following markets: a. Pure monopoly b. Oligopoly c. Monopolistic competition d. Perfect competition
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Explain why it is sometimes difficult to apply the MR 5 MC rule in actual business situations.
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Suppose short-run inverse demand in a monopolistically competitive market is represented by: p ( x ) = 18 - 0.2 x. Cost is given by: TC( x ) = 320 + 2 x + 0.05 x 2. a. Given these demand and cost conditions, what price, output, and profits result in the short run b. What will happen as the firm moves from the short to the long run Suppose entry or exit causes the demand curve to rotate on its p axis. In particular, assume that inverse demand can be described by: p ( x ) = 18 - m • x. c. What output and price result in LRMCE
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