Case / Fair - Chapter 13 - 1-2-9-12-14-15

Chapter 13 - 1-2-9-12-14-15

This is a guidance answer ... your actual answer during the exam should be longer than this answer ...

1.     (a)    Disagree. A monopolist chooses quantity so that sets MC = MR, but then charges a price higher than MR. This is because a monopolist faces a downward-sloping demand curve. To sell more output, it must lower its price.

        (b)    Disagree. Demand still constrains monopoly. There are always substitutes (however distant) for a monopoly’s output. A rise in price causes a decrease in sales and may or may not decrease total revenue. But there is only one price that will maximize a monopoly’s profits.

        (c)    Agree. Demand elasticity is equal to –1  at the midpoint of the demand curve, and the marginal revenue curve bisects the quantity axis at that same level of output.

2.     A competitive firm can sell all the output it wants without having any impact on market price. For each additional unit sold, its revenue will rise by the market price. Hence, MR is the same at all levels of output.

        Each time a monopolist increases output by 1 unit, it must lower the price to sell it. The additional revenue the monopolist receives is less than the price because consumers who were already buying the output get a price break too. MR  is thus lower than price; and as output increases, both price and MR  decline.

9.     Answers will vary, but may include information such as the following in addressing the three questions:

        In what ways has Google acted to suppress competition? By purchasing DoubleClick, Google dominates the Internet advertising business. By purchasing YouTube, Google immediately took control of the web’s growing video market. Google’s increasing dominance in ad-serving gives it the power to make exclusive deals regarding internet searches and advertising with major Internet websites, and this will continue to expand its influence over its users.

        What private suits have been brought against Google? Two of the antitrust suits filed against Google include one filed by KinderStart, based on their unhappiness with their search engine placement, and one filed by Microsoft, requesting the government block Google’s acquisition of DoubleClick.

What are the benefits of a strong, profitable Google? A strong, profitable Google means continued reliability and convenience for its millions of users who enjoy its services. Growth at Google is good for its employees and shareholders and is also good for its users who want to enjoy more online innovations. Businesses that advertise with Google will also benefit because the stronger and more profitable Google is, the more exposure its advertising clients will receive.

12.    A monopoly is a single firm industry that has a product for which there are no close substitutes and that can block entry of new firms. The whole point of having a monopoly is that you can charge a price that is higher than the competitive price and prevent competition with barriers to entry. This makes it possible to earn economic profits over time. Generic rock bands face incredible competition. Whenever one seems to make it, 20 similar bands show up keeping the price of a gig down. But if you have a sound that lots of people like and a name that becomes recognized, you are acquiring market power in the form of a brand name that people may be willing to pay for. When demand becomes less elastic, it means that you can raise price without losing all of the demand for your product.

14.    A supply curve shows the relationship between the price of a product and the quantity of the product supplied. In perfect competition, the supply curve in the short run is the portion of the firm’s marginal cost curve that lies above the average variable cost curve. As the price of a good changes, the perfectly competitive firm moves up and down its marginal cost curve to determine the output quantity to produce. The output quantity produced by a monopoly depends on its marginal cost curve and on the marginal revenue associated with a specific price, which is based on the shape of its demand curve, so the amount of output is not independent of the shape of the demand curve as it is in pure competition. Therefore, a monopolist does not have a supply curve.

15.    This does not necessarily constitute a monopoly. Even though Gloria has the only McDonald’s in town, this does not mean that there are not any other competitors in town, such as Burger King, Wendy’s, or In-N-Out Burger. Also, consumers may be able to drive to a nearby town to patronize a different McDonald’s restaurant.

Courtesy of Case/Fair/Oster, 11th edition, 2014