Victoria Berahmandpour Accounting GM545

Assignment Week 3
Chapter 9
1. Are McDonalds and Starbucks monopolies? Why or why not? Monopoly means there is only one seller and a company control market and price for specific product or service. By knowing the meaning of monopoly, Starbucks and McDonalds are not monopolies. Both companies have many competitors close to them such as Jack in the box or Peets coffee. 6. Using the figure for a monopoly firm below, answer the following questions.

a. What will be the monopoly price, output, and profit for this firm? When output is 50 million units, the MR=MC and demand line shows the price of $45 million. Total profits are as follows: Profits = TR TC = ($45 * 50) ( $30 * 50) = $750 million .

(50 , 45)
profit

(50 , 30)

b. If this monopolist could perfectly price discriminate, what would profit equal? Perfect price discriminate is the area above MC line. So, total profits is as follows: $60 - $30 = $30 $30 * 100 = $3,000 $3,000 / 2 = $1,500 million

(0 , 60)

(100 , 30) (0 , 30)

c. If this industry was competitive, what would be the price, output, and profit? In case of competitive industry, the price is equal Marginal Revenue and Marginal Cost (P = MR = MC). The graph shows that MR = MC at output of 100 million and price is $30 million.

d. How large (in dollars) is the deadweight loss from this monopolist? Deadweight loss is the area under the demand curve and above the MC curve. So, the deadweight loss is as follows: $45 - $30 = $15 million $15 * (100 50) = $750 million $750 / 2 = $375 million

(50 , 45)

(100 , 30) (50 , 30)

7. Using the figure for a natural monopoly firm below, answer the following questions.

a. Roughly what would be the monopoly price, output, and profit for this unregulated natural monopolist?

$42 Cm $31Pm e

ATC MC D MR

140

For 140 units, price is $42 for monopoly output. Profit would be: ($42 31) * 140 = $1,540 million.

b. Assume that regulators use the competitive P=MC for regulation. Roughly how high would the total subsidy have to be to keep this firm in the industry over the long run?

26 16 MR 330

ATC MC D

If P = MC, then the output is 330 million and price is $16 and ATC price is almost $25. So, the difference on price is $9. Therefore, $9 * 330 = $2,970 million.

c. Using P=ATC as the regulatory approach, approximately what would be the price, output, and profits for this monopolist?

MR 260

ATC MC D

At P = ATC, the output is 260 and price is $25. Profit would be 0.

Chapter 9
1. How do monopolistic competitive markets differ from competitive markets? If monopolistically competitive firms are making economic profits in the short run, what happens in the long run? Monopolistic competitive markets involve all firms that produce similar products, able to enter the industry if the profits are attractive, and profit maximizers. And, Competitive markets involve a large number of buyers and sellers and none of them can affect price in market. Therefore, monopolistic competitive markets differ from competitive markets by product differentiation. In short run economic profits will be small because demand is very elastic compare to competitors. In long run profit will be normal because of easy entry and exit. 2. Describe the assumption underlying the kinked demand curve model. Describe why marginal cost can vary, but price remains constant. Kinked demand curve model shows stability of price, if the firm raise the price, competitors dont react but if the firm lower the price, competitors will match the price. Because MR curve shows discontinue, therefore MC can vary and price stay constant. 3. How many firms constitute an oligopoly? What else characterizes oligopoly markets? A large market shares are controlled by a few firms. Characteristic of oligopoly are control over price, entry barriers, and mutual interdependence. 8. We saw in the last chapter that the HHI (Herfindahl-Hirshman index) is used by the Department of Justice to measure industry concentration. Since domestically we have virtually no monopolies, some would argue that the HHI is really used to measure the degree of oligopoly. However, the HHI represents domestic concentration, and many of the products we purchase are made globally and sold in the United States by foreign firms. Has global competition made these HHI estimates less meaningful? Are old-line American oligopolies (autos, steel, and airlines) more like monopolistic competitors today? Why or why not? HHI represents of measuring industry concentration which is equal to the sum of the squares of market shares for all firms in the industry. So, because monopoly is allow in U.S., there will be a conflict when we purchase products from foreign firms and sell in United States. Therefore, the answer is yes; global competition made these HHI estimates less meaningful. Old-line American oligopolies are more like monopolistic competitors today compare to the past. Because, most firms has to compete with foreign firms and act most like monopolistic.

13. Without admitting wrongdoing, Proctor & Gamble (P&G) in 1998 paid a fine and settled antitrust charges brought by the New York Attorney General because P&G eliminated its coupon program. The Attorney General concluded the firms in the industry were colluding and argued that eliminating coupons was only possible (or profitable) if everybody goes along with it. Is this a clever use of game theory by the New York Attorney General? Construct a Prisoners Dilemma game that supports his contention. This question is very tricky and Im not a lawyer and not practice for being a lawyer. However, I can just say that if P&G manipulate the market and play monopoly power which cause price goes up and kind of controlling the market price compare to competitors. By eliminating coupon, P&G cause other competitors make less profits. 15. When trying to get tickets to the Lion King recently, my wife may have had a chance to see game theory in action. Tickets for shows 6 months away went on sale online at 6:00 in the morning and she was there at 6:02. Every time she requested seats in a good area, she was informed they were unavailable, but others in much worse locations were available. No matter what day or which show, less attractive alternatives were suggested. Can you think of a game theory explanation that might suggest why this was happening? That completely obvious, this game has been going on for many firms especially for airplanes. Good seats are usually sells more and even more if they sell almost close to the show day (black market). They save these seats for making more profits. On the other hand, worst seats are hard to sell so, they push to sell these seats first.