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MICRO M4 ASSIGN
Module at a Glance
Topic Overview
This module extends the microeconomic principles to cover the various forms of market imperfections
and some of the roles the government plays in our economic system. With market imperfections,
producers will continue to maximize profits, but the market imperfections will cause them to act in
different ways and sub-optimal equilibriums will occur and economic profits may be able to occur even
in the long run. Depending on the degree of market imperfection, public policy intervention may be
necessary. In the new international economy mega-sized corporate structures have evolved and
introduced new forms of imperfect competition and information deficiencies have increased risk
management issues.
Learning Objectives
A major objective is to learn the distinctions between the competitive ideal of the last module and the
various forms of market imperfection: pure monopoly, monopolistic competition and oligopoly within
the new global economy and reformed information mechanisms. Another objective is to see graphically
the consequences of the downward sloping firm demand curve and the consequent separation of the
MR curve from the demand curve and the benefits from international trade and risk management
priorities.
Readings
Text Chapters 13-15 and 19-20
Instructor’s Commentary
Corporations have grown larger and industries have become more concentrated as the new global
economy has allowed them more flexibility to buy out competitors and move into new markets with
major influence from government policymakers and international regulators as trade agreements are
negotiated. Major new markets are being established by fast growth of the major emerging economies
and by advertising as the new technologies and information systems spread the potential to the most
remote parts of the world. As resource constraints become increasingly tight, nation states are
maneuvering to establish controls over them and to negotiate reliable access to scarce resource
supplies. How do the old microeconomic models fit into this new framework and can they help to
explain market incentives and market processes in the new international economy that eclipse national
boundaries?
Welfare Loss
We learned in the first module that the demand curve measures the willingness of consumers to pay for
a product. As such, it measures their wants and desires (as backed by their ability to pay) for the goods
and services that they choose to purchase. The area under the demand curve thus measures the total
welfare received from consuming the product (remember the diamond/water example).
In the competitive ideal the demand curve, as seen by the individual firm, was horizontal and coincided
with the MR curve. Therefore, when the firm maximized profits by producing the output where MR=MC
it was also producing at MC=AR=market price. Thus, to maximize profits, the firm was induced to expand
output up to the point where MC=MR=AR and no further.
At that output not only were profits maximized, but also consumer (social) welfare was maximized.
Beyond that level of output the marginal benefit to the consumer (as measured by the price they are
willing to pay) is less than the marginal opportunity cost (as measured by the MC curve). At a lower
output the marginal benefit (once again as measured by the price they are willing to pay) is greater than
the marginal opportunity cost (as measured by the MC curve). You can see this by looking back at any
competitive ideal graph from the previous module.
Once we introduce some form of market power on the part of firms the link between MR and AR is
broken and so is the link between profit maximization and social welfare maximization. The firms will
continue to maximize profits at the output where MR=MC, but at this output people would still be
willing to pay more for the next unit of output (as measured by AR or market price at that output) than
the opportunity cost of that next unit of output (measured as always by the MC at that output).
The welfare loss resulting from less than the optimal output being produced is measured by the area
between the two curves (the demand curve and the MC curve) over that range of output.
The welfare loss and the market power consequences of imperfect competition (especially monopoly)
raises important public policy questions and options. How much interference we want in our markets
has been much debated in the press and political debate over the last decade or two. A basic question
is, is the welfare gain enough to offset the imperfections of public policy processes?
Labor Unions
Unions are often picked on for forcing companies to pay their workers more than they’re worth. In the
end, however, our previous logic tells us that once firms have market power, union successes force
profit maximizing firms to find ways to improve the productivity of these workers by increasing other
resources relative to their numbers, increasing training and technological innovation. In a flip-flop of
previous arguments, the MPP and VMP of labor is made to rise to meet the higher unionized wages.
Worker incomes and standards of living rise as a result. Unions have been most powerful in industries
where large firms have concentrated market power and influence over government economic policies
that subsidized and protected them from foreign competition.
In the post war period unions may have been too powerful and may have placed too many roadblocks in
the way of reasonable policies which might have improved more general standards of living, but with
the losses of job security, families putting in many more hours in the work force to get by and the
explosion of low paying service jobs, one has to wonder if perhaps the pendulum hasn’t swung too far
the other way. How do unions fit into the new international framework?
DISCUSSION
M4 Discussion Topic
Active discussion participation is a requirement for this course, which means you need to be posting at
least two contributions per week and those can either be original threads or responses to other
postings.
Listed below are possible discussion topics for this module, but if you have personal experiences or
examples that relate to the topics presented in the assigned readings, please feel free to add those to
this discussion as well. In developing your thoughts and opinions here, please look to incorporate
citations and statistics both from the textbook and other outside sources. Lastly, let’s always remember
to keep these discussions civilized and respectful, even when we disagree on certain topics.
Respond to this question on your first post, the first week of the discussion:
Time for an honest moment here, stop and think about how much advertising influences your
consumption decisions. When is the last time you can remember choosing one product over another
because of advertising?
Respond to this question on your second post, the first week of the discussion and respond to your
classmates:
What role does advertising play in influencing consumption in monopolistic competition? Does the
impact of advertising allow for some price leverage by firms in this market structure? Why or why not?
Respond to this question on your third post, the second week of the discussion and respond to your
classmates:
Is the United States truly an economy that promotes competition? Think about the markets where
major oligopolies exist, for instance soft drinks/fast foods and automobile manufacturing, is there really
a free market place or do oligopolies/major corporations dominate our economy?
How would the reversal of net neutrality affect competitiveness over the internet? Below is a video of
John Oliver on the subject, I think he does a good job discussing the subject, just be aware the rude
language was used in the video.
https://www.theverge.com/2017/5/8/15577800/john-oliver-net-neutrality-last-week-tonight-ajit-paititle-ii-verizon
Respond to this question on your fourth post, the second week of the discussion and respond to your
classmates:
Why is the government so quick to regulate monopolies and potential monopolies? What are the major
concerns that arise from this market structure?
Respond to this question on your fifth post, the third week of the discussion:
In certain cases, a market may function more efficiently if there is only one producer. Let’s identify
markets, where monopolies may beneficial, and let’s explain why this is the case. HINT: think about
industries that the government allows monopolies to exist and where they permit and regulate these
industries.
1. Diamond rings are relatively scarce because:
diamond producers limit the quantity supplied to the market.
the demand for diamonds is so high.
according to geologists, diamonds are less common than any other gem-quality stone.
of monopolistic competition.
2. You own a lemonade stand in a competitive market, and as such, you are a price-taking firm.
Which of the following events would most likely increase your market power?
The average total cost curve for firms in the industry is horizontal.
The government abolishes the system of patents and copyrights.
You own exclusive rights to harvest lemons from all domestic citrus orchards.
A booming economy increases the demand for lemonade and attracts entry into the
market.
3. The large barriers to entry are a reason a monopoly:
produces at the minimum average total cost in the long run.
earns an economic profit in the long run.
produces with no fixed costs in the long run.
maximizes its profits by producing where P = MC.
4. The demand curve for a monopoly is:
the entire MR curve.
the MR curve above the horizontal axis.
above the MR curve.
the MR curve above the AVC curve.
5. The demand curve for a monopoly is:
the MR curve above the horizontal axis.
also the industry demand curve.
the MC curve above the AVC curve.
identical to the MR curve.
6. The GoSports Company is a profit-maximizing firm with a monopoly in the production of
school team pennants. The firm sells its pennants for $10 each. We can conclude that
GoSports is producing a level of output at which:
average total cost is greater than $10.
average total cost equals $10.
marginal revenue equals $10.
marginal cost equals marginal revenue.
7. Figure: Short-Run Monopoly
Reference: Ref 13-1
(Figure: Short-Run Monopoly) Look at the figure Short-Run Monopoly. The marginal cost
of producing the profit-maximizing quantity is cost:
P.
N.
Q.
O.
8. Figure: A Profit-Maximizing Monopoly Firm
Reference: Ref 13-3
(Figure: A Profit-Maximizing Monopoly Firm) Look at the figure A Profit-Maximizing
Monopoly Firm. This firm’s cost per unit at its profit-maximizing quantity is:
$18.
$20.
$8.
$15.
9. Figure: Monopoly Model
Reference: Ref 13-6
(Figure: Monopoly Model) Look at the figure Monopoly Model. When the firm is in
equilibrium (that is, maximizing its economic profit), its total revenue is the area of
rectangle:
0PDJ.
IPDH.
SPDB.
0SBJ.
10. Figure: PPV
Reference: Ref 13-7
(Figure: PPV) Look at the figure PPV, which shows the demand and marginal revenue for a
pay-per-view football game on cable TV. Assume that the marginal cost and average cost
are a constant $20. If the cable company is in a perfectly competitive industry, how much is
consumer surplus?
$160
$500
$0
$320
11. Figure: Water Works
Reference: Ref 13-10
(Figure: Water Works) Look at the figure Water Works, which describes a small town’s
water works, a natural monopoly. If the water works is unregulated and maximizes profit,
how much profit will it earn?
$1,400
$800
$1,600
$1,000
12. Price discrimination can occur if:
producers are price takers.
the market structure is a monopolistic competition.
there are many firms in the industry, all producing the same identical good.
all consumers have the same willingness to pay for the good.
13. Price discrimination leads to a _____ price for consumers with a _____ demand.
higher; perfectly elastic
higher; more elastic
lower; less elastic
lower; more elastic
14. Suppose a monopoly can separate its customers into two groups. If the monopoly practices
price discrimination, it will charge the lower price to the group with:
the fewer close substitutes.
the higher price elasticity of demand.
the lower price elasticity of demand.
The answer cannot be determined with the information given.
15. Figure: PPV
Reference: Ref 13-13
(Figure: PPV) Look at the figure PPV, which shows the demand and marginal revenue for a
pay-per-view football game on cable TV. Assume that the marginal cost and average cost
are a constant $40. If the cable company practices perfect price discrimination, consumer
surplus will be:
$100.
$0.
$40.
$180.
16. Figure: The Profit-Maximizing Output and Price
Reference: Ref 13-17
(Figure: The Profit-Maximizing Output and Price) Look at the figure The ProfitMaximizing Output and Price. Assume that there are no fixed costs and AC = MC = $200.
The profit-maximizing output for a monopolist is:
16.
20.
8.
0.
17. Figure: The Profit-Maximizing Output and Price
Reference: Ref 13-17
(Figure: The Profit-Maximizing Output and Price) Look at the figure The ProfitMaximizing Output and Price. Assume that there are no fixed costs and AC = MC = $200.
At the profit-maximizing output and price for a perfectly competitive industry, deadweight
loss is:
$0.
$200.
$1,600.
$3,200.
18. Scenario: A Small-Town Monopolist
A monopolist sells cable subscriptions in a small town and finds that it can sell 100
subscriptions when the price is $15 a week and an additional 75 subscriptions when the
price is $10 a week. The MC for the provision of the cable is $5 a week. There are no fixed
costs.
Reference: Ref 13-23
(Scenario: A Small-Town Monopolist) Look at the scenario A Small-Town Monopolist. If
the company is allowed to offer different prices for its good, what is the maximum amount
of profit this company can earn?
$750
$1,375
$1,000
$1,520
19.
PillCo is a pharmaceutical company that has exclusive right to sell Qu-R, a one of a kind
cancer treatment. The demand (D) and marginal revenue (MR) curves for the company are
shown below. The diagram also shows two possible quantity and price combinations for the
firm: (Q1, P1) and (Q2, P2).
Part 1: Use the quadrilateral tool to illustrate the price effect (Pe) from increasing output
from Q1 to Q2.
Part 2: Use the quadrilateral tool to illustrate the quantity effect (Qe) from increasing output
from Q1 to Q2.
20.
Lenny’s Café is the only source of coffee for hundreds of miles in any direction. The
demand curve, marginal revenue curve, and marginal cost curve for Lenny’s Café are
given in the following diagram.
Part 1: Use a vertical drop line to identify the profit-maximizing quantity (Qm) Lenny
should produce. Make sure that the highest point of the drop line for Qm is placed on the
marginal cost curve.
Part 2: Use a horizontal drop line to identify the price (Pm) Lenny should charge. Make
sure that the end of the drop line for Pm is placed on the demand curve.
Part 3: Use the appropriate area tool (either the quadrilateral tool or the triangle tool) to
show the area of profit (or loss) in the graph. Label this area appropriately as “Profit” or as
“Loss”. Assume that there are no fixed costs.
Part 4: Use the appropriate area tool (either the quadrilateral tool or the triangle tool) to
show the area that represents the amount of consumer surplus (CS) that is earned at the
monopoly price.
Part 5: Use a double drop line to identify the perfectly competitive output and price (Epc).
Part 6: Use the appropriate area tool (either the quadrilateral tool or the triangle tool) to
show the deadweight loss (DL) associated with the monopoly.
1. To be called an oligopoly, an industry must have:
independence in decision making.
a horizontal demand curve.
relatively easy entry and exit.
a small number of interdependent firms.
2. If there are two gas stations in a very small town, then the gas station business there is
probably best characterized as:
oligopolistic.
monopolistic.
monopolistically competitive.
perfectly competitive.
3. In which of the following situations does overt collusion take place?
Competition among a large number of small firms generates a stable market price.
Firms in an industry agree openly on price and output, and they jointly make other
decisions aimed at achieving monopoly profits.
Competition among a large number of small firms generates similar but slightly
different prices.
Smaller firms in an industry have an unspoken agreement to charge the same price as
the largest firm.
4.
Reference: Ref 14-1
(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The
market for gadgets consists of two producers, Margaret and Ray. Each firm can produce
gadgets with no marginal cost or fixed cost. Suppose that these two producers have formed a
cartel, agreed to split production of output evenly and are maximizing total industry profits.
If Margaret decides to cheat on the agreement and sell 100 more gadgets, the market price of
gadgets will be:
$5.
$4.
$6.
$7.
5. Figure: Monopoly Profits in Duopoly
Reference: Ref 14-2
(Figure: Monopoly Profits in Duopoly) Look at the figure Monopoly Profits in Duopoly.
Each firm faces an identical demand curve, D1, and the market demand curve is D2. The
figure illustrates how firms can reap monopoly profits even in an industry with:
free entry and exit.
a four-firm concentration ratio of 50.
two firms.
monopolistic competition.
6. Figure: Collusion
Reference: Ref 14-3
(Figure: Collusion) Look at the figure Collusion. The price charged by the industry with
collusion is shown by:
W.
Z.
Y.
X.
7.
Reference: Ref 14-4
(Table: Demand for Crude Oil) Look at the table Demand for Crude Oil. Assume that the
crude oil industry is a duopoly and the marginal cost and fixed cost of producing crude oil
equal zero. Suppose that the two firms are maximizing industry profit and splitting the profit
evenly. If both firms decide to cheat and produce 10 more barrels each, industry output will
be _____ barrels.
100
110
160
120
8. In the classic prisoners’ dilemma with two accomplices in crime, the dominant strategy for
each individual is to:
confess.
not confess.
confess only if the other confesses.
This game does not have a dominant strategy.
9. A strategy that is the same regardless of the action of the other player in a game is a _____
strategy.
competitive
dominant
tit-for-tat
trigger
10. Tacit collusion in an industry is limited by:
a large number of firms and the bargaining power of buyers.
the bargaining power of buyers.
a large number of firms.
simple products and pricing.
11. Figure: Payoff Matrix for Gehrig and Gabriel
Reference: Ref 14-12
(Figure: Payoff Matrix for Gehrig and Gabriel) The figure Payoff Matrix for Gehrig and
Gabriel describes two people who sell handmade Davy Crockett figurines in San Antonio.
Both Gehrig and Gabriel have two strategies available to them: to produce 5,000 figurines
each month or to produce 7,000 figurines each month. The combined profits of the two are
maximized if Gehrig produces _____ figurines and Gabriel produces _____ figurines.
5,000; 7,000
7,000; 7,000
5,000; 5,000
7,000; 5,000
12. Figure: Pricing Strategy in Cable TV Market II
Reference: Ref 14-14
(Figure: Pricing Strategy in Cable TV Market II) Look at the figure Pricing Strategy in
Cable TV Market II. If CableNorth followed a high-price strategy one month just to find it
only earned $80,000 because CableSouth followed a low-price strategy, and CableNorth
decided to lower prices for the next month, we would say that CableNorth is following:
a dominant strategy.
a kinked demand model.
a tit-for-tat strategy.
a collusive strategy.
13. The purpose of the trusts established in the United States in the late 1800s was to:
engage in monopoly pricing.
promote competition in the transportation industry.
promote international trade.
limit the involvement of governme …
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