Questions and Answers of Public Organizations

It can be shown thatwhere is a summation sign (sum over all products j other than product i), p is price, and Q is the compen- sated demand. Explain how this relation can be used to relate the
Where demand curves are compensated (adjusted for income effects), it can be shown that b where Q is the quantity demanded, p is the price, and subscripts indicate the products i or j. Suppose p; Pj
Suppose there are some industries in which the compet- itive equilibrium does not exist (the core does not ex- ist-see www.awlonline.com/carlton_perloff "Theory of the Core"). Should firms in these
Suppose Firm A is the only one that can sell in New 5 York. Firm A faces competition elsewhere in the coun- try. If Firm A can price discriminate, will the prices in New York differ from those
In United Shoe, the Court ruled that the 10-year leases adversely affected competition, in part, because they prevented other competitors from selling to a customer who had a United Shoe lease. Such
Suppose that all the buyers for a particular product live in Country 1, and all the firms that manufacture that product are in Country 2 . The foreign supply curve is Q=p. The demand curve is Q =
A competitive industry with an upward-sloping supply curve sells of its product in its Home country and Qin a Foreign country, so that the total quantity that it sells is Q Q+Q. No one else produces
Suppose Firm 1 in Country 1 produces Good 1 and Firm 2 in Country 2 produces Good 2.Both goods are sold only to consumers in other countries. The demand curves for the two goods are 4 = 15-2p+P2 92 =
Use a diagram to illustrate the net gain to a country from taxing a foreign monopoly.
Can there be free riding and a gray market even if the retail prices in two countries are the same? If so, who would be engaged in shipping the product abroad?
Suppose two customers pay different prices for the identical physical product. Give a sufficient condition such that it is reasonable for an analyst to conclude that there is no price discrimination.
Is the establishment of an organized auction market more likely to benefit small firms or large firms?
Suppose that a firm has an upward-sloping marginal cost curve. Illustrate how the price-marginal cost mar- gin behaves as price increases. How does the price- average cost margin change as price
Suppose an industry produces to order. What economic conditions would have to change for it to become a produce-to-stock industry?
Suppose a bakery must bake bread at a constant unit cost of production of $1 before it observes the demand for bread. It will have either 100 or 50 customers, and each outcome is equally likely. Each
Using an argument similar to that for monopolistic competition, show that firms operate on the downward- sloping section of their average cost curves for inven- tive activities.
If the government could only observe prices, quanti- ties, and royalty rates (but did not know the demand curves or the marginal cost curves), could it determine if a royalty was for a minor or major
Graphically illustrate (using the benefit and cost curves in Figure 16 .1) the effect of a longer patent life on the incentive to invent.
What is the effect of a profits tax on the incentives to invent?
What is the effect of a sales (revenue) tax on the incen- tive to invent under a patent system?
Why does an artist destroy a lithograph plate after mak- ing a fixed number of copies?
Suppose the cost of producing a machine that lasts N pe- riods is C(N) N2, If the interest rate is 5 percent, what duration should the firm plan for its machine? De- scribe the conditions determining
Explain how the analysis in Problem 1 is affected if four-wheel-drive tractors are close substitutes for other types of tractors.
Explain how the analysis in Problem I is affected if an investment tax credit (which lowers a firm's taxes in proportion to the amount spent on new capital) encour ages overconsumption of tractors.
Explain how the analysis in Problem 1 is affected if farmers never sell or buy used tractors (that is, transac- tion costs are too high for a used tractor market to de- velop).
Explain how the analysis in Problem 1 is affected if farmers can maintain tractors forever,
Use Example 15 .2 to calculate the elasticity of demand facing a monopoly producer of four-wheel drive trac- tors, assuming it rents in the future but has sold units in the past, of which 20 units
Using the model in Appendix 14A, suppose the inverse demand curve facing a monopoly is pa+a-bQ where a is the amount of advertising, and the cost function is mQ. Determine the optimal level of adver-
What happens if a firm advertises, but only some peo- ple see the ads? Hint: Consider the tourists-and-natives model in Chapter 13 . 4 . A manufacturer uses vertical restraints in its contract with
What is the profit-maximizing rule for advertising if advertising depreciates (that is, consumers forget about it over time if not reminded)?
Use a graph to illustrate Shapiro's (1980) critique of the Dixit and Norman (1978) argument that if a mo- nopoly's advertising only informs consumers that a product exists rather than shifting
A firm spends a large amount on advertising that informs consumers of the brand name of its bananas.Should consumers conclude that its bananas are likely to be of higher quality than unbranded
Determine the equilibrium prices, quantities, and number of high- and low-price stores in the tourist-and-native model if consumers have downward-sloping, linear demand curves: $q = a - bp$, where
Suppose that two economists write a textbook. Their publisher offers them royalties on sales of the book equal to $\alpha$ percent of the sales revenue. The economists are concerned. They believe
Suppose that there are two types of firms. All firms have U-shaped average cost curves, where $n$ firms have average costs of $AC(q)$ and $m$ firms have average cost curves of $AC(q) + k$. There are
Give an explanation for why the first-year depreciation of new cars is so high. (If you buy a new car and try to sell it in the first year—indeed, in the first few days after you buy it—the price
One possible measure of the degree of vertical integra- tion is the ratio of value added (sales minus material and energy costs) to sales. Contrast this measure for a mining firm and for a car
A woman wants to present a friend with a gift and, as an inside joke, wants to present it inside an empty red-and-white-striped barrel of Kentucky Fried Chicken.She tries to buy the empty carton from
A monopolistic producer uses a dealer network, in which it limits the number of dealers and restricts them to exclusive territories, to sell its product in another country. Some importers buy the
If a pure profits tax (a percentage of the economic profits)is collected at the retail level, does a downstream monopoly's incentive to vertically integrate change?Does the incentive change if the
Suppose a monopolistic upstream firm sells to a number of downstream firms, and one of these is a monopoly in its retail market. If vertical integration is impractical, what might the government do
Show that it is more efficient (larger joint profits) for a franchisor to collect from a franchisee a royalty that is a percentage of profits rather than sales. Why do most franchisors collect
What should public policy be toward vertical restraints? Do these restrictions necessarily hurt retailers and cons
Why do some manufacturers establish vertical restraints that give their dis- tributors some of their monopoly power?
What should public policy be toward vertical integration? We know that hori- zontal mergers sometimes have anticompetitive effects; is the same true for vertical mergers?
Why do firms vertically integrate? Why not rely on the market (other firms) to supply inputs and distribute products?
In Figure 10.3, if your costs of production are 31 each for halibut and pie, which pricing scheme-individual pricing, pure bundling, or mixed bundling-maximizes your profit?
A monopoly produces and delivers goods to consumers who are located at varying distances from the factory It costs m per unit to produce the good and $1 per mile to transport a unit of the good.
Let the demand for Products 1 and 2 be q = 10-2p +p and q 10+P-2p2, where q; is the quantity of Good i and p; is the price of Good i. Assume produc- tion costs are zero. Calculate the prices that two
Suppose a manufacturer sells a button-fastening ma- chine that saves a firm the labor cost of le per button sewn on shirts. Suppose firms differ in the total number of buttons they sew on. The
A person who consumes X units of Good 1 and Yunits of Good 2 derives utility of Y+ 10X. Suppose the per- son has $100, the price of Y is S1, and the nonlinear ex- penditure for purchasing X units of
Look at www.awlonline.com/carlton perloff "De- rivation of the Optimal Two-Part Tariff," which dis- cusses the optimal two two-part tariffs to charge. Explain intuitively why it is optimal to charge
Suppose a firm gives coupons to selected consumers that entitle them to price discounts. Why might the firm limit the number of coupons that a customer can use on a single purchase?
Would a price-discriminating monopoly ever produce less than a nondiscriminating monopoly?
Suppose a consumer wants just 1 unit of a good and is willing to pay at most $10. Draw the demand curve and calculate the maximum consumer surplus that can be extracted. Suppose that there is a
else. Can you explain a senior-citizen discount from movie theaters by appealing to this "different product" argument? Suppose there are two groups of consumers and that it is optimal for a
It is often difficult to distinguish price discrimination from different prices for differentiated products. For example, if teachers recommend the magazines they read to students, they are helping
Suppose there are two types of customers. Show dia- grammatically that welfare can be either higher or lower under simple monopoly compared to discrimi- nating monopoly.
Suppose a firm has a monopoly in aluminum ingot and that it vertically integrates to produce its own alu- minum wire, as discussed in the chapter. Will any inde- pendent aluminum wire producers
Distinguish between zero profits and a price-cost mar- gin that equals zero.
(Difficult) Evaluate the following argument: "There ex- ist demand curves for which a monopoly would pass along cost increases in price on a one-for-one basis. Therefore, nothing can be inferred
Concentration ratios are typically a firm's share of do- mestic production. If the United States engages in more international trade, will such concentration measures lose meaning? Could this effect
An industry has a price of p* and earns a rate of return on its capital. The industry is characterized by a fixed- proportions production technology (a fixed proportion of labor and capital is
Why do empirical researchers often include the adver- tising-sales and the capital-sales ratios in equations ex- plaining performance?
Show graphically that, if a firm's MC = AC = a con- stant, it will produce a product if it is socially desirable for that product to be produced.
What is the effect of a cost-saving technological change on a monopolistic competition industry in which the cost curves facing each firm are C(q) = mq + F. where m is the constant marginal cost, and
In Hotelling's town, if all firms are required to charge the same fixed price, describe the equilibrium location of three firms. Explain your answer. Now describe the equilibrium for four firms.
Explain and illustrate the following claim: "In our ex- ample, a monopolistic competition industry with homo- geneous products cannot be more than one firm away from the output sold at price equals
In an oligopolistic industry with homogeneous prod- ucts and firms with Cournot expectations, must profits fall when a new firm enters? Why or why not? (For an answer, see Seade, 1980.)
Compare the effect of a franchise tax (a lump-sum tax independent of the sales activity of the firm) on a mo- nopolistic competition industry to its effects on a mo- nopoly or competitive industry.
What is the relationship between the Stackelberg model and the dominant-firm-competitive-fringe model (Chap- ter 4)?
For n 2, 5, 10, 50, and 1,000, add columns to Table 6.2 for:a. Market elasticity,e, which equals (doldp) (p/O).b. Lerner's measure of market power, (p-MC)lp.c. Consumer surplus.d. Social welfare
What happens to price and output in the Cournot, Bertrand, and Stackelberg models if marginal costs in- crease by 10 percent?
What are the best strategies for Players 1 and 2 if each chooses between setting a low price or a high price and the payoffs are 5 if both firms charge the high price and zero for all other
In the Cournot example in this chapter, fixed costs were assumed to be zero and marginal (average) costs were constant. What additional complications are raised if the cost functions have the usual
Under what conditions are the Cournot and Bertrand equilibria the same?
In what way does a cartel consisting of only some firms in a market correspond to the dominant firm model de- scribed in Chapter 4?
(Problem based on Appendix 5A.) Show that a cartel's price falls as the number of noncartel firms () in- creases.
(Problem based on Appendix 5A.) Show that the sum of a cartel's output plus the output of noncartel firms is less than the competitive output and that the corre- sponding price is higher than the
Use a graph to show why an increase in the market de- mand elasticity reduces a cartel's monopoly power. Show how an increase in the market demand elasticity affects the elasticity of the residual
Using the data in Example 5 .4 , calculate the market de- mand elasticity for automobiles in the mid-1950s. For large changes in price and quantity, an arc elasticity is used. One common method of
Suppose cartel members have lower (average and mar- ginal) costs than noncartel firms. Draw the residual de- mand curve facing the cartel. (What assumptions are you making about entry?) Show on the
Would a profit-maximizing dominant firm ever pro- duce more than if it were a monopoly? Hint: Show the behavior of both a monopoly and a dominant firm (in the no-entry model) on the same graph and
How would the no-entry model diagrams (Figure 4.6) change if fringe firms had the usual U-shaped average and marginal cost curves? Assume that because of a barrier to entry, there are only fringe
By showing the behavior of both a monopoly and a dominant firm in the same graph, show that monopoly profits are greater than the profit of a dominant firm in the no-entry equilibrium (MC). Show how
Suppose the Environmental Protection Agency sets new requirements that raise the (fixed) costs of report- ing compliance with pollution control rules (Pashigian 1984). How would this change affect
Suppose the demand curve for corn is Q(p) = 10-p. Suppose that one firm owns all five units of corn in the world and has zero marginal cost. Does a monopoly sell less output than would be sold in a
If the demand curve is Q(p) =p, what is the elasticity of demand? If marginal cost is $1 and e = -2, what is the profit-maximizing price?
If the demand curve is Q(p) = 5/p, what is the elastic- ity of demand? What is total revenue when p = $1 and when p = $30? If production costs $1 per unit, and the smallest production level is 1
Suppose that the supply of football players is elastic at the lowest salary levels paid. Would a monopsony of football players restrict output?
If the demand curve is Q(p) 10-p and the marginal cost is constant at 4, what is the profit-maximizing mo- nopoly price and output? What is the price elasticity at the monopoly price and output?
Suppose the government knows the private and social marginal cost curves, MC, and MC, but it knows the demand curve imperfectly. The government believes that the demand curve is either abQ ora- bo
When is a firm's shutdown point equal to the minimum point on its average cost curve?
If the market demand curve is Q100-p. what is the market price elasticity of demand? If the supply curve of individual firms is q=p and there are 50 identical firms in the market, draw the residual
Suppose a competitive market consists of identical firms with a constant long-run marginal cost of $10. (There are no fixed costs in the long run.) Suppose the demand curve at any price, p, is given
The government imposes a fixed fee per year on each firm that operates in a competitive market. What hap- pens to output, the optimal scale of a firm, and price if there is free entry into the market?
Will a tax of $1 per unit of output change the optimal scale of a competitive firm if all firms are identical and any firm can enter the market?
Suppose there are a wide range of plant sizes in an in- dustry. What do you conclude about the shape of the average cost curve if the plants are in the same area? Assume plants in the same area face
Why can the measure of economies of scope not ex- ceed one as long as marginal costs are always positive?
If there are economies of scope and if the price for each supply of custom-made paper. product equals marginal cost, is it possible for a firm to cover all its costs? If the firm's average cost of

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