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Four different market structures in the product market.

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Problem Set 6;Market Structures;1.;It is usual to divide markets into four categories. In ascending order of competitiveness these;are (fill in the missing three);1.;monopoly.;2.;3...........................................................................................................................................;4.;2.....................................................................................................................................................................................................................................................................................;To which of the above four categories do the following apply to the member firms? (There can;be more than one market category in each case.);(a) Firms face a downward sloping demand curve.....................................................................;(b) New firms can freely enter the industry..................................................................................;(c) Firms produce a homogeneous product.................................................................................;(d) Firms are price takers.............................................................................................................;(e) Firms face an elastic demand (but less than infinity) at the profit-maximizing output...........................................................................................................................................;(f);Firms will produce where MR = MC if they wish to maximize profits..................................;(g) There is perfect knowledge on the part of consumers of price and product quality...........................................................................................................................................;3.;In which of the four categories would you place each of the following? (It is possible in some;cases that part of the industry could be in one category and part in another: if so name both.);(a) A village post office.................................................................................................................;(b) Restaurants in large town........................................................................................................;(c) Banks.......................................................................................................................................;(d) Hi-fi manufacturers.................................................................................................................;(e) Producers of barley.................................................................................................................;(f);Water supply...........................................................................................................................;(g) Local buses.............................................................................................................................;(h) The market for foreign currency.............................................................................................;4.;The following diagram shows the cost curves of a firm under perfect competition.;$;MC;12;11;10;9;AC;AV C;MC;8;7;6;5;4;3;2;1;0;0;10;20;30;40;50;60;70;80;90;1 00;Quantity;(a) How much will the firm produce in order to maximize profits at a price;of $8 per unit?........................................;(b) What will be its average cost of production at this output?.........................................................;(c) How much (supernormal) profit will it make?.............................................................................;(d) How much will the firm produce in order to maximize profits at a price;of $5 per unit?.........................................;(e) How much (supernormal) profit will it make?.............................................................................;(f);How much will the firm produce in order to maximize profits at a price;of $4 per unit?.........................................;(g) What will be its profit position now?...........................................................................................;(h) Below what price would the firm shut down in the short run?....................................................;(i);Below what price would the firm shut down in the long run?.....................................................;2;5. A monopolist is faced with the following cost and revenue curves;$;(a) What is the maximum-profit output?;80.............................................................;(b) What is the maximum-profit price?;MC;70.............................................................;(c) What is the total revenue at this price;and output?;60;50;AC.............................................................;(d) What is the total cost at this price and;output?;40;30.............................................................;(e) What is the level of profit at this price;and output?;20;AR;10;(f).............................................................;If the monopolist were ordered to;produce 300 units, what would be the;market price?;0;0;100;200;300;400;500;600;-10.............................................................;(g) How much profit would now be;made?;-20;MR;Q uantity.............................................................;(h) If the monopolist were faced with the same demand, but average costs were constant at;$60 per unit, what output would maximize profit?..........................................................................;(i);What would be the price now?................................................................................................;(j);How much profit would now be made?...................................................................................;(k) Assume now that the monopolist decides not to maximize profits, but instead sets a price;of $40. How much will now be sold?...........................................................................................;(l);What is the marginal revenue at this output?..........................................................................;(m) What does the answer to (l) indicate about total revenue at a price of $40?...........................;(n) What is the price elasticity of demand at a price of $40? (You do not need to do a;calculation to work this out: think about the relationship between MR and TR.)............................;3;6.;Which of the following are characteristics of oligopoly?;(a) There are just a few firms that dominate the industry..................................................... Yes/No;(b) There are few if any barriers to the entry of new firms into the industry....................... Yes/No;(c) The firms may produce either a homogeneous or a differentiated product.................... Yes/No;(d) The firms face downward sloping demand curves.......................................................... Yes/No;(e) There is little point in advertising because there are so few firms................................. Yes/No;(f) Oligopolists tend to take into account the actions and reactions of other firms............. Yes/No;7.;Under which of the following circumstances is collusion likely to break down?;(a) There is a reduction in barriers to international trade.................................................... Yes/No;(b) The market becomes more stable................................................................................... Yes/No;(c) One of the firms develops a new cost-saving technique................................................ Yes/No;(d) One of the firms becomes dominant in the industry...................................................... Yes/No;(e) The number of firms in the industry decreases.............................................................. Yes/No

 

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