Economics Homework Nine - Model

1. Identify an industry not mentioned in the lecture that is an oligopoly, and explain why.

Video game companies like Nintendo, Sony and X-box (don't know who makes X-box) is an example of an oligopoly, because there is few competitors. It takes a lot of time effort and money to make a new company with its own system and games. And most of the systems are very similar. (Seth)

An example of an oligopoly is the computer business. There are only a few companies, there are very high barriers to entry (it is very expensive to start a new one) and computers are basically similar goods. (Duncan)

2. Order the types of industries from those having the lowest price (due to the greatest competition) to those having the highest price (due to the least competition).

1) Perfect Competition (MC=MR at a lower point P, where P=ATC)

2) Perfectly Contestable Markets

3) Monopolistic Competition

4) Oligopoly

5) Cartel

6) Monopoly (MC=MR is how the price is determined) (Deborah)

3. Explain which specific type of industry (e.g., oligopoly or something else) each of these quotes probably refers to: (1) "She's the finest hair stylist in town; no one has her special style!", (2) "Crazy Eddie ... his low prices are INSANE!", (3) "Don't like his prices? He's the only one in town selling what you need."

1) Monopolistic Competition 2) Perfect Competition 3) Monopoly (Zachary)

4. List how monopolies can be established.

1. Government creates monopolies by operation of law.

2. The licensing of professionals creates a barrier to entry.

3. Control of a valuable resource.

4. Economies of scale can create a monopoly by rewarding the biggest company with the lowest average cost.

5. Government grants of monopoly such as patents and copyrights. (Anna)

5. What prevents a monopoly from increasing its prices without limitation?

A monopoly cannot simply increase its prices without limitation because, like any other firm, it is still subject to the Law of Demand no matter how powerful it becomes. (Trisha)

Honors

6. Where is the Nash equilibrium for this set of options, where (x,y) represents the profits to (Firm A, Firm B)? Explain.

		Firm A Does Not Reduce Output	Firm A Reduces Output
	Firm B Does Not Reduce Output	(50,50)	(100,25)
	Firm B Reduces Output	(25,100)	(75,75)

[Teacher's Note: Unfortunately, there is a mistake in the ordering of the paired numbers used in this problem, which I realized only after grading the answers. The numbers were in the wrong order because a firm's profits should increase, not decrease, under this situation. All students correctly realized that the equilibrium must be where the profits are equal, either (50,50) or (75,75). If the profits increased for each firm when it increases profits, then the equilibrium would be (50,50), which would be the correct answer on an exam. But under the numbers provided, firms increase profits by reducing output, and (75,75) is the correct answer.]

7. Monopolies: should the government regulate them? Or is regulation worse?

As the Coase theorem illustrates, when government barges into the free market, complications and more transaction costs are the result. The government should let the invisible hand take care of it and not interfere. Great ruckus would occur if the government attempted to end a monopoly. It would cause industries to become bankrupt because the more competition the more difficult it is to survive. (Veronika)

8. Does the "deadweight loss" equal the "consumer surplus"? Explain the relationship.

The question states “does the deadweight loss equal the consumer surplus?” No, it doesn’t: deadweight loss reduces but may not entirely eliminate consumer surplus. However, the deadweight loss is almost the exact opposite of the consumer surplus. With the deadweight loss, consumers may be forced to spend more than they would like to on something, because the monopoly is the only provider of it. With the consumer surplus, the consumer gets to pay less than he is willing. (Addison) [Teacher's note: the deadweight loss also eliminates part of the producer surplus]

9. How does a monopolist maximize his profits?

He raises his price until marginal revenue equals marginal cost .... (Elizabeth)