Econ1110 Microeconomics

Q1a. Does perfect competition, as we have defined it in the lecture, exist in the real world? Explain your answer.

b. Why do we study the perfectly competitive model?

Q2a. Given the information in Table 1 for a firm operating in a perfectly competitive market, expand the table and calculate TC, TR, and profit for each level of Q. Assume TFC = $65 and P = $4. Use this data to determine and indicate the output and dollar amount at which the firm maximizes profits and the break-even point(s). Note the profit maximizing and break-even quantities on the table.

Table 1

b. On the same graph, provide TR and TC, and indicate the profit maximization and break-even point(s).

c. Building on the information you provided in Table 1, calculate MR, MC, AVC, and ATC. Either add them to the previous table or create a new one.

d. Prepare a new graph and plot the firm’s demand curve, MC, ATC, and AVC curves. Indicate the output at which the firm maximizes its total profits and the output in which the firm would shut down.

e. What can we expect will happen to this firm and the industry in the long run?

Q3. A monopoly firm, being the sole supplier of its product, can charge any price it wants for the quantity level it decides to sell. Critically evaluate this statement.

Q4. Table 3 contains the output, prices, and total costs for a monopoly firm

Table 3

Calculate TR, MR, MC, and Profit. Determine the quantity that corresponds to maximum profits. Are MR=MC at this point? Why or why not?

Q5a. Why does a monopolistic competitor have a downward sloping demand curve?

b. How does the monopolistic competitor decide how much output to produce? How does this differ from a perfectly competitive firm? Draw a graph of each market to help explain your answer.

d. Can we derive the monopolistic competitor’s supply curve from its MC curve? Why or why not?

e. What happens in the long run if the monopolistic competitor is making short-run positive profits?

f. How does a monopolistic competitor avoid the long run situation?

Q6 At a time when demand for ready-to-eat cereal was stagnant, a spokesperson for the cereal maker Kellogg’s was quoted as saying, “. . . for the past several years our individual company growth has come out of the other fellow’s hide.” Kellogg’s has been producing cereal since 1906 and continues to implement strategies that make it a leader in the cereal industry. Suppose that when Kellogg’s and its largest rival advertise, each company earns $0 in profits. When neither company advertises, each company earns profits of $12 billion. If one company advertises and the other does not, the company that advertises earns $52 billion and the company that does not advertise loses $4 billion.

a. Construct a payoff matrix for Kellogg and its rival for all possible price decisions.

b. Assuming no collusion, what would be the dominant pricing strategy for each firm?

c. Suppose in year 1, each firm decides to pursue cooperative pricing through collusion. What will be Kellogg’s annual profits?

d. Suppose in year 2, Kellogg decides to pursue opportunistic behavior. What will be Kellogg’s profit in year 2? What will the rival earn?

e. In the long run, what would be the most profitable pricing strategy for each of these two firms?

Q7. What is product differentiation? In which market types does it occur, and what are its costs and benefits?

Q8. Explain the potential social costs and benefits of oligopoly.

Q9. Explain how the Lorenz curve is used as a measure of Income Distribution. Is this a good tool? Why or why not?

Q10. What are the four main determinants of income differences? What are two ways that income ought to be distributed?

Q11. What the private costs of driving an automobile?  The external costs?  The social costs?

Q12a. What are externalities?  Give an example of an externality and explain.

b. Why are externalities typically associated with common property rather than private property?