mnakiw solutionschapter 14-17

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Chapter 14: SOLUTIONS TO TEXT PROBLEMS:

Quick Quizzes

1. When a competitive firm doubles the amount it sells, the price remains the same, so its

total revenue doubles.

2. The price faced by a profit-maximizing firm is equal to its marginal cost because if priceere above marginal cost, the firm could increase profits by increasing output, hile if price ere belo marginal cost, the firm could increase profits by decreasing output.

! profit-maximizing firm decides to shut don in the short run hen price is less thanaverage variable cost. "n the long run, a firm ill exit a mar#et hen price is less thanaverage total cost.

$. "n the long run, ith free entry and exit, the price in the mar#et is equal to both a firm%s

marginal cost and its average total cost, as &igure 1 shos. The firm chooses its quantityso that marginal cost equals price' doing so ensures that the firm is maximizing its profit."n the long run, entry into and exit from the industry drive the price of the good to theminimum point on the average-total-cost curve.

i!ure 1

Questi"#s $"r Re%ie&

1. ! competitive firm is a firm in a mar#et in hich( )1* there are many buyers and manysellers in the mar#et' )2* the goods offered by the various sellers are largely the same' and)$* usually firms can freely enter or exit the mar#et.

2. &igure 2 shos the cost curves for a typical firm. &or a given price )such as P +*, the level

7



Chapter 14/Firms in Competitive Markets 8

of output that maximizes profit is the output here marginal cost equals price )Q+*, aslong as price is greater than average variable cost at that point )in the short run*, orgreater than average total cost )in the long run*.

i!ure '

$. ! firm ill shut don temporarily if the revenue it ould get from producing is less thanthe variable costs of production. This occurs if price is less than average variable cost.

. ! firm ill exit a mar#et if the revenue it ould get if it stayed in business is less than itstotal cost. This occurs if price is less than average total cost.

. ! firms price equals marginal cost in both the short run and the long run. "n both the

short run and the long run, price equals marginal revenue. The firm should increaseoutput as long as marginal revenue exceeds marginal cost, and reduce output if marginalrevenue is less than marginal cost. /rofits are maximized hen marginal revenue equalsmarginal cost.

0. The firms price equals the minimum of average total cost only in the long run. "n theshort run, price may be greater than average total cost, in hich case the firm is ma#ing profits, or price may be less than average total cost, in hich case the firm is ma#inglosses. ut the situation is different in the long run. "f firms are ma#ing profits, otherfirms ill enter the industry, hich ill loer the price of the good. "f firms are ma#inglosses, they ill exit the industry, hich ill raise the price of the good. ntry or exit

continues until firms are ma#ing neither profits nor losses. !t that point, price equalsaverage total cost.

3. 4ar#et supply curves are typically more elastic in the long run than in the short run. "n acompetitive mar#et, since entry or exit occurs until price equals the minimum of averagetotal cost, the supply curve is perfectly elastic in the long run.




Pr"()e*s a#+ ,pp)icati"#s

1. ! competitive mar#et is one in hich( )1* there are many buyers and many sellers in themar#et' )2* the goods offered by the various sellers are largely the same' and )$* usuallyfirms can freely enter or exit the mar#et. 5f these goods, bottled ater is probably the

closest to a competitive mar#et. Tap ater is a natural monopoly because theres onlyone seller. 6ola and beer are not perfectly competitive because every brand is slightlydifferent.

2. 7ince a ne customer is offering to pay 8$99 for one dose, marginal revenue beteen299 and 291 doses is 8$99. 7o e must find out if marginal cost is greater than or lessthan 8$99. To do this, calculate total cost for 299 doses and 291 doses, and calculate theincrease in total cost. 4ultiplying quantity by average total cost, e find that total costrises from 89,999 to 89,91, so marginal cost is 891. 7o your roommate should notma#e the additional dose.

$. a. :emembering that price equals marginal cost hen firms are maximizing profit,e #no the marginal cost must be $9 cents, since that is the price.

b. The industry is not in long-run equilibrium since price exceeds average total cost.

. 5nce you have ordered the dinner, its cost is sun#, so it does not represent an opportunitycost. !s a result, the cost of the dinner should not influence your decision about stuffingyourself.

. 7ince ob%s average total cost is 82;9<19 = 82;, hich is greater than the price, he illexit the industry in the long run. 7ince fixed cost is 8$9, average variable cost is )82;9 -8$9*<19 = 82, hich is less than price, so ob on%t shut don in the short run.

0. >ere%s the table shoing costs, revenues, and profits(

Qua#tit- T"ta)

C"st

Mar!i#a

) C"st

T"ta)

Re%e#ue

Mar!i#a

)

Re%e#ue

Pr"$it

9 8 ; --- 8 9 --- 8 -;

1 ? 8 1 ; 8 ; -1

2 19 1 10 ; 0

$ 11 1 2 ; 1$

1$ 2 $2 ; 1?

1? 0 9 ; 21




0 23 ; ; ; 21

3 $3 19 0 ; 1?

a. The firm should produce or 0 units to maximize profit.

b. 4arginal revenue and marginal cost are graphed in &igure $. The curves cross ata quantity beteen and 0 units, yielding the same anser as in part )a*.

c. This industry is competitive since marginal revenue is the same for each quantity.The industry is not in long-run equilibrium, since profit is positive.

i!ure .

3. a. &igure shos the short-run effect of declining demand for beef. The shift of theindustry demand curve from D1 to D2 reduces the quantity from Q1 to Q2 andreduces the price from P 1 to P 2. This affects the firm, reducing its quantity fromq1 to q2. efore the decline in the price, the firm as ma#ing zero profits'afterards, profits are negative, as average total cost exceeds price.




i!ure 4

b. &igure shos the long-run effect of declining demand for beef. 7ince firmsere losing money in the short run, some firms leave the industry. This shifts thesupply curve from S 1 to S $. The shift of the supply curve is @ust enough toincrease the price bac# to its original level, P 1. !s a result, industry output fallsstill further, to Q$. &or firms that remain in the industry, the rise in the price to P 1 returns them to their original situation, producing quantity q1 and earning zero profits.

i!ure /

;. &igure 0 shos that although high prices cause an industry to expand, entry into theindustry eventually returns prices to the point of minimum average total cost. "n thefigure, the industry is originally in long-run equilibrium. The industry produces outputQ1, here supply curve S 1 intersects demand curve D1, and the price is P 1. !t this point




the typical firm produces output q1. 7ince price equals average total cost at that point, thefirm ma#es zero economic profit.

Ao suppose an increase in demand occurs, ith the demand curve shifting to D2. Thiscauses Bhigh pricesB in the industry, as the price rises to P 2. "t also causes the industry to

increase output to Q2. With the higher price, the typical firm increases its output from q1 to q2, and no ma#es positive profits, since price exceeds average total cost.

>oever, the positive profits that firms earn encourage other firms to enter the industry.Their entry, Ban expansion in an industry,B leads the supply curve to shift to S $. The neequilibrium reduces the price bac# to P 1, Bbringing an end to high prices andmanufacturers prosperity,B since no firms produce q1 and earn zero profit again. Theonly long-lasting effect is that industry output is Q$, a higher level than originally.

i!ure 0

?. a. &igure 3 shos the typical firm in the industry, ith average total cost ATC 1,marginal cost MC 1, and price P 1.

b. The ne process reduces >i-Tech%s marginal cost to MC 2 and its average totalcost to ATC 2, but the price remains at P 1 since other firms cannot use the ne process. Thus >i-Tech earns positive profits.

c. When the patent expires and other firms are free to use the technology, all firms%average-total-cost curves decline to ATC 2, so the mar#et price falls to P $ and firmsearn no profits.




i!ure

19. The rise in the price of petroleum increases production costs for individual firms and thusshifts the industry supply curve up, as shon in &igure ;. The typical firms initialmarginal-cost curve is MC 1 and its average-total-cost curve is ATC 1. "n the initialequilibrium, the industry supply curve, S 1, intersects the demand curve at price P 1, hichis equal to the minimum average total cost of the typical firm. Thus the typical firm earnsno economic profit.

The increase in the price of oil shifts the typical firms cost curves up to MC 2 and ATC 2,and shifts the industry supply curve up to S 2. The equilibrium price rises from P 1 to P 2, but the price does not increase by as much as the increase in marginal cost for the firm.!s a result, price is less than average total cost for the firm, so profits are negative.

"n the long run, the negative profits lead some firms to exit the industry. !s they do so,the industry-supply curve shifts to the left. This continues until the price rises to equalthe minimum point on the firms average-total-cost curve. The long-run equilibriumoccurs ith supply curve S $, equilibrium price P $, industry output Q$, and firms outputq$. Thus, in the long run, profits are zero again and there are feer firms in the industry.




i!ure 2

11. a. &igure ? illustrates the situation in the C.7. textile industry. With no internationaltrade, the mar#et is in long-run equilibrium. 7upply intersects demand at quantityQ1 and price 8$9, ith a typical firm producing output q1.

i!ure 3

b. The effect of imports at 82 is that the mar#et supply curve follos the old supply

curve up to a price of 82, then becomes horizontal at that price. !s a result,demand exceeds domestic supply, so the country imports textiles from othercountries. The typical domestic firm no reduces its output from q1 to q2,incurring losses, since the large fixed costs imply that average total cost ill bemuch higher than the price.

c. "n the long run, domestic firms ill be unable to compete ith foreign firms because their costs are too high. !ll the domestic firms ill exit the industry and




other countries ill supply enough to satisfy the entire domestic demand.

12. a. &igure 19 shos the current equilibrium in the mar#et for pretzels. The supplycurve, S 1, intersects the demand curve at price P 1. ach stand produces quantity

q1 of pretzels, so the total number of pretzels produced is 1,999 x q1. 7tands earnzero profit, since price equals average total cost.

b. "f the city government restricts the number of pretzel stands to ;99, the industry-supply curve shifts to S 2. The mar#et price rises to P 2, and individual firms produce output q2. "ndustry output is no ;99 x q2. Ao the price exceedsaverage total cost, so each firm is ma#ing a positive profit. Without restrictionson the mar#et, this ould induce other firms to enter the mar#et, but they cannot,since the government has limited the number of licenses.

c. The city could charge a license fee for the licenses. 7ince it is a lump-sum fee for

the license, not based on the quantity of sales, such a tax has no effect on marginalcost, so ont affect the firms output. "t ill, hoever, reduce the firms profits.!s long as the firm is left ith a zero or positive profit, it ill continue to operate.7o the license fee that brings the most money to the city is to charge each firm theamount ) P 2 - ATC 2*q2, the amount of the firms profit.

i!ure 1

1$. a. &igure 11 illustrates the gold mar#et )industry* and a representative gold mine)firm*. The demand curve, D1, intersects the supply curve at industry quantity Q1 and price P 1. 7ince the industry is in long-run equilibrium, the price equals theminimum point on the representative firms average total cost curve, so the firm produces output q1 and ma#es zero profit.

b. The increase in @eelry demand leads to an increase in the demand for gold,shifting the demand curve to D2. "n the short run, the price rises to P 2, industryoutput rises to Q2, and the representative firms output rises to q2. 7ince price no




exceeds average total cost, the representative firm no earns positive profits.

c. 7ince gold mines are earning positive economic profits, over time other firms illenter the industry. This ill shift the supply curve to the right, reducing the price belo P 2. ut its unli#ely that the price ill fall all the ay bac# to P 1, since

gold is in short supply. 6osts for ne firms are li#ely to be higher than for olderfirms, since theyll have to discover ne gold sources. 7o its li#ely that the long-run supply curve in the gold industry is upard sloping. That means the long-runequilibrium price ill be higher than it as initially.

i!ure 11

1. a. &igure 12 shos cost curves for a 6alifornia refiner and a non-6alifornia refiner.

7ince the 6alifornia refiner has access to loer-cost oil, its costs are loer.

i!ure 1'

b. "n long-run equilibrium, the price is determined by the costs of non-6aliforniarefiners, since 6alifornia refiners cannot supply the entire mar#et. The mar#et




price ill equal the minimum average total cost of the other refiners' they illthus earn zero profits. 7ince 6alifornia refiners have loer costs, they ill earn positive profits, equal to ) P + - ATC C * x QC .

c. Des, there is a subsidy to 6alifornia refiners that is not passed on to consumers.

The subsidy accounts for the long-run profits of the 6alifornia refiners. "t arisessimply because the oil cannot be exported.

Chapter 1/: SOLUTIONS TO TEXT PROBLEMS:

Quick Quizzes

1. ! mar#et might have a monopoly because( )1* a #ey resource is oned by a single firm')2* the government gives a single firm the exclusive right to produce some good' and )$*the costs of production ma#e a single producer more efficient than a large number of producers.

xamples of monopolies include( )1* the ater producer in a small ton, hich ons a#ey resource, the one ell in ton' )2* pharmaceutical companies ho are given a patenton a ne drug by the government' and )$* a bridge, hich is a natural monopoly because)if the bridge is uncongested* having @ust one bridge is efficient. 4any other examplesare possible.

2. ! monopolist chooses the amount of output to produce by finding the quantity at hichmarginal revenue equals marginal cost. "t finds the price to charge by finding the pointon the demand curve at that quantity.

$. ! monopolist produces a quantity of output that%s less than the quantity of output thatmaximizes total surplus because it produces the quantity at hich marginal cost equalsmarginal revenue rather than the quantity at hich marginal cost equals price.

. /olicyma#ers can respond to the inefficiencies caused by monopolies in one of fourays( )1* by trying to ma#e monopolized industries more competitive' )2* by regulatingthe behavior of the monopolies' )$* by turning some private monopolies into publicenterprises' and )* by doing nothing at all. !ntitrust las prohibit mergers of largecompanies and prevent them from coordinating their activities in ays that ma#e mar#etsless competitive, but such las may #eep companies from merging to gain from

synergies. 7ome monopolies, especially natural monopolies, are regulated by thegovernment, but it is hard to #eep a monopoly in business, achieve marginal-cost pricing,and give the monopolist incentive to reduce costs. /rivate monopolies can be ta#en over by the government, but the companies are not li#ely to be ell run. 7ometimes doingnothing at all may seem to be the best solution, but there are clearly deadeight lossesfrom monopoly that society ill have to bear.

. xamples of price discrimination include( )1* movie tic#ets, for hich children and




senior citizens get loer prices' )2* airline prices, hich are different for business andleisure travelers' )$* discount coupons, hich lead to different prices for people hovalue their time in different ays' )* financial aid, hich offers college tuition at loer prices to poor students and higher prices to ealthy students' and )* quantity discounts,hich offer loer prices for higher quantities, capturing more of a buyer%s illingness to

pay. 4any other examples are possible.

/erfect price discrimination reduces consumer surplus, increases producer surplus by thesame amount, and has no effect on total surplus, compared to a competitive mar#et.6ompared to a monopoly that charges a single price, perfect price discrimination reducesconsumer surplus, increases producer surplus, and increases total surplus, since there isno deadeight loss.


1. !n example of a government-created monopoly comes from the existence of patent andcopyright las. oth allo firms or individuals to be monopolies for extended periods oftimeE29 years for patents, forever for copyrights. ut this monopoly poer is good, because ithout it, no one ould rite a boo# )because anyone could print copies of it,so the author ould get no income* and no firm ould invest in research anddevelopment to invent ne products or drugs )since any other company could produce orsell them, and the firm ould get no profit from its investment*.

2. !n industry is a natural monopoly hen a single firm can supply a good or service to anentire mar#et at a smaller cost than could to or more firms. !s a mar#et gros it mayevolve from a natural monopoly to a competitive mar#et.

$. ! monopolists marginal revenue is less than the price of its product because( )1* itsdemand curve is the mar#et demand curve, so )2* to increase the amount sold, themonopolist must loer the price of its good for every unit it sells. )$* This cut in pricesreduces revenue on the units it as already selling.

! monopolists marginal revenue can be negative because to get purchasers to buy anadditional unit of the good, the firm must reduce its price on all units of the good. Thefact that it sells a greater quantity increases revenue, but the decline in price decreasesrevenue. The overall effect depends on the elasticity of the demand curve. "f the demandcurve is inelastic, marginal revenue ill be negative.




. &igure 1 shos the demand, marginal-revenue, and marginal-cost curves for amonopolist. The intersection of the marginal-revenue and marginal-cost curvesdetermines the profit-maximizing level of output, Qm. The demand curve then shos the profit-maximizing price, P m.

i!ure 1

. The level of output that maximizes total surplus in &igure 1 is here the demand curveintersects the marginal-cost curve, Qc. The deadeight loss from monopoly is thetriangular area beteen Qc and Qm that is above the marginal-cost curve and belo thedemand curve. "t represents deadeight loss, since society loses total surplus because ofmonopoly, equal to the value of the good )measured by the height of the demand curve*

less the cost of production )given by the height of the marginal-cost curve*, for thequantities beteen Qm and Qc.

0. The government has the poer to regulate mergers beteen firms because of antitrustlas. &irms might ant to merge to increase operating efficiency and reduce costs,something that is good for society, or to gain monopoly poer, hich is bad for society.

3. When regulators tell a natural monopoly that it must set price equal to marginal cost, to problems arise. The first is that, because a natural monopoly has a constant marginal costthat is less than average cost, setting price equal to marginal cost means that the price isless than average cost, so the firm ill lose money. The firm ould then exit the industry

unless the government subsidized it. >oever, getting revenue for such a subsidy ouldcause the government to raise other taxes, increasing the deadeight loss. The second problem of using costs to set price is that it gives the monopoly no incentive to reducecosts.

;. 5ne example of price discrimination is in publishing boo#s. /ublishers charge a muchhigher price for hardbac# boo#s than for paperbac# boo#sEfar higher than the differencein production costs. /ublishers do this because die-hard fans ill pay more for a




hardbac# boo# hen the boo# is first released. Those ho dont value the boo# as highlyill ait for the paperbac# version to come out. The publisher ma#es greater profit thisay than if it charged @ust one price.

! second example is the pricing of movie tic#ets. Theaters give discounts to children and

senior citizens because they have a loer illingness to pay for a tic#et. 6hargingdifferent prices helps the theater increase its profit above hat it ould be if it charged @ust one price.


1. The folloing table shos revenue, costs, and profits, here quantities are in thousands,and total revenue, total cost, and profit are in millions of dollars(

Price Qua#tit-

516s7

T"ta)

Re%e#ue

Mar!i#a

)Re%e#ue

T"ta)

C"st

Pr"$it

8 199 9 8 9 ---- 8 2 8 -2

?9 199 ? 8 ? $ 0

;9 299 10 3 12

39 $99 21 10

09 99 2 $ 0 1;

9 99 2 1 3 1;

9 099 2 -1 ; 10

$9 399 21 -$ ? 12

29 ;99 10 - 19 0

19 ?99 ? -3 11 -2 9 1,999 9 -? 12 -12

a. ! profit-maximizing publisher ould choose a quantity of 99,999 at a price of809 or a quantity of 99,999 at a price of 89' both combinations ould lead to profits of 81; million.

b. 4arginal revenue is alays less than price. /rice falls hen quantity rises because the demand curve slopes donard, but marginal revenue falls evenmore than price because the firm loses revenue on all the units of the good soldhen it loers the price.

c. &igure 2 shos the marginal-revenue, marginal-cost, and demand curves. Themarginal-revenue and marginal-cost curves cross beteen quantities of 99,999and 99,999. This signifies that the firm maximizes profits in that region.




i!ure '

d. The area of deadeight loss is mar#ed FGWHI in the figure. Geadeight lossmeans that the total surplus in the economy is less than it ould be if the mar#etere competitive, since the monopolist produces less than the socially efficientlevel of output.

e. "f the author ere paid 8$ million instead of 82 million, the publisher ouldn%tchange the price, since there ould be no change in marginal cost or marginalrevenue. The only thing that ould be affected ould be the firm%s profit, hichould fall.

f. To maximize economic efficiency, the publisher ould set the price at 819 per boo#, since that%s the marginal cost of the boo#. !t that price, the publisherould have negative profits equal to the amount paid to the author.




i!ure .

2. &igure $ illustrates a natural monopolist setting price, P ATC , equal to average total cost.The equilibrium quantity is Q ATC . 4arginal cost pricing ould yield the price P MC andquantity Q MC . &or quantities beteen Q ATC and Q MC , the benefit to consumers )measured by the demand curve* exceeds the cost of production )measured by the marginal costcurve*. This means that the deadeight loss from setting price equal to average total costis the triangular area shon in the figure.

$. 4ail delivery has an alays-declining average-total-cost curve, since there are large fixedcosts for equipment. The marginal cost of delivering a letter is very small. >oever, thecosts are higher in isolated rural areas than they are in densely populated urban areas,

since transportation costs differ. 5ver time, increased automation has reduced marginalcost and increased fixed costs, so the average-total-cost curve has become steeper atsmall quantities and flatter at high quantities.

. "f the price of tap ater rises, the demand for bottled ater increases. This is shon in&igure as a shift to the right in the demand curve from D1 to D2. The correspondingmarginal-revenue curves are MR1 and MR2. The profit-maximizing level of output ishere marginal cost equals marginal revenue. /rior to the increase in the price of tapater, the profit-maximizing level of output is Q1' after the price increase, it rises to Q2.The profit-maximizing price is shon on the demand curve( it is P 1 before the price oftap ater rises, and it rises to P 2 after. !verage cost is AC 1 before the price of tap ater

rises and AC 2 after. /rofit increases from ) P 1 - AC 1* x Q1 to ) P 2 - AC 2* x Q2.




i!ure 4

. a. &igure illustrates the mar#et for groceries hen there are many competingsupermar#ets ith constant marginal cost. 5utput is Q6, price is P 6, consumersurplus is area !, producer surplus is zero, and total surplus is area !.

i!ure /

b. "f the supermar#ets merge, &igure 0 illustrates the ne situation. Juantitydeclines from QC to Q M and price rises to P M . !rea ! in &igure is equal to area K 6 K G K K & in &igure 0. 6onsumer surplus is no area K 6, producersurplus is area G K , and total surplus is area K 6 K G K . 6onsumers transferthe amount of area G K to producers and the deadeight loss is area &.




i!ure 0

0. a. The folloing table shos total revenue and marginal revenue for each price andquantity sold(

Pric

e

Qua#tit- T"ta)

Re%e#ue

Mar!i#a

)

Re%e#ue

T"ta)

C"st

Pr"$it

2 19,999 829,999

---- 8 9,999 8 1?9,999

22 29,999

9,999

8 29 199,999 $9,999

29 $9,999099,999

10 19,999 9,999

1; 9,999329,999

12 299,999 29,999

10 9,999;99,999

; 29,999 9,999

1 09,999;9,999

$99,999 9,999

b. /rofits are maximized at a price of 810 and quantity of 9,999. !t that point,

profit is 89,999.

c. !s Lohnnys agent, you should recommend that he demand 89,999 from them,so he instead of the record company receives all of the profit.

3. "4s monopoly poer ill be constrained to the extent that people can substitute othercomputers for mainframes. 7o the government might have loo#ed at the demand curvefacing "4, or the divergence beteen "4s price and marginal cost, to get some idea




of ho severe the monopoly problem as.

;. a. The table belo shos total revenue and marginal revenue for the bridge. The profit-maximizing price ould be here revenue is maximized, hich ill occurhere marginal revenue equals zero, since marginal cost equals zero. This occurs

at a price of 8 and quantity of 99. The efficient level of output is ;99, sincethats here price equals marginal cost equals zero. The profit-maximizingquantity is loer than the efficient quantity because the firm is a monopolist.

Price Qua#tit- T"ta) Re%e#ue Mar!i#a)

Re%e#ue

8 ; 9 8 9 ----

3 199 399 8 3

0 299 1,299

$99 1,99 $ 99 1,099 1

$ 99 1,99 -1

2 099 1,299 -$

1 399 399 -

9 ;99 9 -3

b. The company should not build the bridge because its profits are negative. Themost revenue it can earn is 81,099,999 and the cost is 82,999,999, so it ould lose899,999.

i!ure

c. "f the government ere to build the bridge, it should set price equal to marginal




cost to be efficient. ut marginal cost is zero, so the government should notcharge people to use the bridge.

d. Des, the government should build the bridge, because it ould increase societystotal surplus. !s shon in &igure 3, total surplus has area 1<2 x ; x ;99,999 =

8$,299,999, hich exceeds the cost of building the bridge.

?. a. &igure ; illustrates the drug companys situation. They ill produce quantity Q1 at price P 1. /rofits are equal to ) P 1 - AC 1* x Q1.

i!ure 2

b. The tax on the drug increases both marginal cost and average cost by the amountof the tax. !s a result, as shon in &igure ?, quantity is reduced to Q2, price risesto P 2, and average cost plus tax rises to AC 2.




i!ure 3

c. The tax definitely reduces profits. !fter all, the firm could have producedquantity Q2 at price P 2 before the tax as imposed, but it chose not to because thislevel did not maximize profit before the tax occurred.

d. ! tax of 819,999 regardless of ho many bottles of the drug are produced ouldresult in the quantity produced at Q1 and the price at P 1 in &igure ; because such atax does not affect marginal cost or marginal revenue. "t does, hoever, raiseaverage cost' in fact, profits decline by exactly 819,999.

19. Harry ants to sell as many drin#s as possible ithout losing money, so he ants to setquantity here price )demand* equals average cost, hich occurs at quantity QH and price P H in &igure 19. 6urly ants to bring in as much revenue as possible, hich occurshere marginal revenue equals zero, at quantity QC and price P C . 4oe ants tomaximize profits, hich occurs here marginal cost equals marginal revenue, at quantity

Q M and price P M .

i!ure 1

11. a. Hong-distance phone service as originally a natural monopoly because

installation of phone lines across the country meant that one firms costs eremuch loer than if to or more firms did the same thing.

b. With communications satellites, the cost is no different if one firm supplies themor if many firms do so. 7o the industry evolved from a natural monopoly to acompetitive mar#et.

c. "t is efficient to have competition in long-distance phone service and regulated




monopolies in local phone service because local phone service remains a naturalmonopoly )being based on land lines* hile long-distance service is a competitivemar#et )being based on satellites*.

12. a. The patent gives the company a monopoly, as shon in &igure 11. !t a quantity

of Q M and price of P M , consumer surplus is area ! K , producer surplus is area 6K G, and total surplus is area ! K K 6 K G.

i!ure 11

b. "f the firm can perfectly price discriminate, it ill produce quantity QC and extract

all the consumer surplus. 6onsumer surplus is zero and producer surplus is ! K K 6 K G K , as is total surplus. Geadeight loss is reduced from area to zero.There is a transfer of surplus from consumers to producers of area ! K .

1$. ! monopolist alays produces a quantity at hich the demand curve is elastic. "f thefirm produced a quantity for hich the demand curve ere inelastic, then if the firmraised its price, quantity ould fall by a smaller percentage than the rise in price, sorevenue ould increase. 7ince costs ould decrease at a loer quantity, the firm ouldhave higher revenue and loer costs, so profit ould be higher. Thus the firm should#eep raising its price until profits are maximized, hich must happen on an elastic portion of the demand curve.

!nother ay to see this is to note that on an inelastic portion of the demand curve,marginal revenue is negative. "ncreasing quantity requires a greater percentage reductionin price, so revenue declines. 7ince a firm maximizes profit here marginal cost equalsmarginal revenue, and marginal cost is never negative, the profit-maximizing quantitycan never occur here marginal revenue is negative, so can never be on an inelastic portion of the demand curve.




1. Though ritney 7pears has a monopoly on her on singing, there are many other singersin the mar#et. "f 7pears ere to raise her price too much, people ould substitute toother singers. 7o there is no need for the government to regulate the price of herconcerts.

1. ecause the marginal cost of the music as virtually zero, Aapster enhanced economicefficiency because those individuals ho valued the music more than zero but less thanthe selling price ere able to consume it. >oever, in the long run, musicians and recordcompanies ould have no incentive to release ne music because everyone could on acopy of it ithout paying for it. The courts eventually shut Aapster don because they believed that this access violated copyright las.

10. a. &igure 12 shos the cost, demand, and marginal-revenue curves for themonopolist. Without price discrimination, the monopolist ould charge price P M and produce quantity Q M .

i!ure 1/81'

b. The monopolists profit consists of the to areas labeled M, consumer surplus isthe to areas labeled D, and the deadeight loss is the area labeled N.

c. "f the monopolist can perfectly price discriminate, it produces quantity QC , andhas profit equal to M K D K N.

d. The monopolists profit increases from M to M K D K N, an increase in the amountD K N. The change in total surplus is area N. The rise in monopolists profit isgreater than the change in total surplus, since monopolists profit increases both by the amount of deadeight loss )N* and by the transfer from consumers to themonopolist )D*.

e. ! monopolist ould pay the fixed cost that allos it to discriminate as long as D




K N )the increase in profits* exceeds 6 )the fixed cost*.

f. ! benevolent social planner ho cared about maximizing total surplus ouldant the monopolist to price discriminate only if N )the deadeight loss frommonopoly* exceeded 6 )the fixed cost* since total surplus rises by N - 6.

g. The monopolist has a greater incentive to price discriminate )it ill do so if D K NO 6* than the social planner ould allo )she ould allo it only if N O 6*. Thusif N P 6 but D K N O 6, the monopolist ill price discriminate even though it isnot in societys best interest.


Quick Quizzes

1. 5ligopoly is a mar#et structure in hich only a fe sellers offer similar or identical

products. xamples include the mar#et for tennis balls and the orld mar#et for crudeoil. 4onopolistic competition is a mar#et structure in hich many firms sell productsthat are similar but not identical. xamples include the mar#ets for novels, movies, 6Gs,and computer games.

2. "f the members of an oligopoly could agree on a total quantity to produce, they ouldchoose to produce the monopoly quantity, acting in collusion as if they ere a monopoly.

"f the members of the oligopoly ma#e production decisions individually, they produce agreater quantity than the monopoly quantity because self-interest leads them to producemore than the monopoly quantity.

3. The prisoners’ i!emma is the stor" o# t$o %rimina!s s&spe%te o# %ommittin' a %rime(in $hi%h the senten%e that ea%h re%eives epens )oth on his or her e%ision$hether to %on#ess or remain si!ent an on the e%ision mae )" the other. The#o!!o$in' ta)!e sho$s the prisoners’ %hoi%es*

B"##ie9s ecisi"#

6onfess :emain 7ilent

C)-+e9s

ecisi"#

6onfess onnie gets ; years6lyde gets ; years

onnie gets 29 years6lyde goes free

:emain7ilent

onnie goes free6lyde gets 29 years

onnie gets 1 year6lyde gets 1 year

The li#ely outcome is that both ill confess, since that%s a dominant strategy for both.

The prisoners% dilemma teaches us that oligopolies have trouble maintaining monopoly profits because each oligopolist has an incentive to cheat.




. "t is illegal for businesses to ma#e an agreement about reducing quantities or raising prices.

!ntitrust las are controversial because it isn%t alays clear hich #inds of behavior

these las should prohibit, such as resale price maintenance, predatory pricing, and tying.


1. "f a group of sellers could form a cartel, they ould try to set quantity and price li#e amonopolist. They ould set quantity at the point here marginal revenue equalsmarginal cost, and set price at the corresponding point on the demand curve.

2. &irms in an oligopoly produce a quantity of output greater than the level produced bymonopoly at a price loer than the monopoly price.

$. &irms in an oligopoly produce a quantity of output less than the level produced by a perfectly competitive mar#et at a price greater than the perfectly competitive price.

. !s the number of sellers in an oligopoly gros larger, an oligopolistic mar#et loo#s moreand more li#e a competitive mar#et. The price approaches marginal cost, and thequantity produced approaches the socially efficient level.

. The prisoners dilemma is a game beteen to people or firms that illustrates hy it isdifficult for opponents to cooperate even hen cooperation ould ma#e them all betteroff. ach person or firm has a great incentive to cheat on any cooperative agreement toma#e himself or itself better off.

0. The arms race, advertising, and common resources are some examples of ho the prisoners dilemma helps explain behavior. "n the arms race during the 6old War, theCnited 7tates and the 7oviet Cnion couldnt agree on arms reductions because each asfearful that after cooperating for a hile, the other country ould cheat. "n advertising,to companies ould be better off if neither advertised, but each is fearful that if itdoesnt advertise, the other company ill. When to companies share a commonresource, they ould be better off sharing it. ut fearful that the other company ill usemore of the common resource, each company ends up overusing it.

3. !ntitrust las prohibit firms from trying to monopolize a mar#et. They are used to prevent mergers that ould lead to excessive mar#et poer in any firm and to #eepoligopolists from acting together in ays that ould ma#e the mar#et less competitive.

;. :esale price maintenance occurs hen a holesaler sets a minimum price that retailerscan charge. This might seem to be anticompetitive because it prevents retailers fromcompeting on price. ut that is doubtful because( )1* if the holesaler has mar#et poer, it can exercise such poer through the holesale price' )2* holesalers have no




incentive to discourage competition among retailers since doing so reduces the quantitysold' and )$* maintaining a minimum price may be valuable so retailers ill providecustomers ith good service.


1. a. 5/6 members ere trying to reach an agreement to cut production so theycould raise the price.

b. They ere unable to agree on cutting production because each country has anincentive to cheat on any agreement. The turmoil is a decline in the price of oil because of increased production.

c. 5/6 ould li#e Aoray and ritain to @oin their cartel so they could act li#e amonopoly.

2. a. "f there ere many suppliers of diamonds, price ould equal marginal cost)81,999*, so the quantity ould be 12,999.

b. With only one supplier of diamonds, quantity ould be set here marginal costequals marginal revenue. The folloing table derives marginal revenue(

Price

5th"usa#+s "$ +"))ars7

Qua#tit-

5th"usa#+s7

T"ta) Re%e#ue

5*i))i"#s "$

+"))ars7

Mar!i#a) Re%e#ue

5*i))i"#s "$ +"))ars7

; 9 ----

3 0 2 20 3 2 9

; 9 Q2

? $0 Q

$ 19 $9 Q0

2 11 22 Q;

1 12 12 Q19

With marginal cost of 81,999 per diamond, or 81 million per thousand diamonds,the monopoly ill maximize profits at a price of 83,999 and a quantity of 0,999.!dditional production beyond this point ould lead to a situation here marginal

revenue is loer than marginal cost.

c. "f :ussia and 7outh !frica formed a cartel, they ould set price and quantity li#ea monopolist, so the price ould be 83,999 and the quantity ould be 0,999. "fthey split the mar#et evenly, they ould share total revenue of 82 million andcosts of 80 million, for a total profit of 8$0 million. 7o each ould produce $,999diamonds and get a profit of 81; million. "f :ussia produced $,999 diamonds and7outh !frica produced ,999, the price ould decline to 80,999. 7outh !fricas




revenue ould rise to 82 million, costs ould be 8 million, so profits ould be829 million, hich is an increase of 82 million.

d. 6artel agreements are often not successful because one party has a strongincentive to cheat to ma#e more profit. "n this case, each could increase profit by

82 million by producing an extra thousand diamonds. >oever, if both countriesdid this, profits ould decline for both of them.

$. a. uyers ho are oligopolists try to decrease the prices of goods they buy.

b. The oners of baseball teams ould li#e to #eep players salaries lo. This goalis difficult to achieve because each team has an incentive to cheat on anyagreement, since they ill be able to attract better players by offering highersalaries.

c. The salary cap ould have formalized the collusion on salaries and helped to

prevent any team from cheating.

. 4any ansers are possible, such as pic#ing hich movie to see ith your friend ornegotiating the price of a car. The common lin# among all the activities is that there are @ust a fe people involved ho act strategically.

. a. "f 4exico imposes lo tariffs, then the Cnited 7tates is better off ith high tariffs,since it gets 8$9 billion ith high tariffs and only 82 billion ith lo tariffs. "f4exico imposes high tariffs, then the Cnited 7tates is better off ith high tariffs,since it gets 829 billion ith high tariffs and only 819 billion ith lo tariffs. 7othe Cnited 7tates has a dominant strategy of high tariffs.

"f the Cnited 7tates imposes lo tariffs, then 4exico is better off ith high tariffs,since it gets 8$9 billion ith high tariffs and only 82 billion ith lo tariffs. "fthe Cnited 7tates imposes high tariffs, then 4exico is better off ith high tariffs,since it gets 829 billion ith high tariffs and only 819 billion ith lo tariffs. 7o4exico has a dominant strategy of high tariffs.

b. ! Aash equilibrium is a situation in hich economic actors interacting ith oneanother each choose their best strategy given the strategies others have chosen.The Aash equilibrium in this case is for each country to have high tariffs.

c. The A!&T! agreement represents cooperation beteen the to countries. achcountry reduces tariffs and both are better off as a result.

d. The payoffs in the upper left and loer right parts of the box do reflect a nationselfare. Trade is beneficial and tariffs are a barrier to trade. >oever, the payoffs in the upper right and loer left parts of the box are not valid. ! tariffhurts domestic consumers and helps domestic producers, but total surplusdeclines, as e sa in 6hapter ?. 7o it ould be more accurate for these to




areas of the box to sho that both countries elfare ill decline if they imposedhigh tariffs, hether or not the other country had high or lo tariffs.

0. a. Gropping the letter grade by to letters )e.g., ! to 6* if you have no fun gives the payoffs shon in this table(

;"ur ecisi"#

Wor# 7hir#

C)ass*ate9

s

ecisi"#

Wor# Dou get a 6

6lassmate gets a 6

Dou get a

6lassmate gets a G

7hir# Dou get a G

6lassmate gets a

Dou get a G

6lassmate gets a G

b. The li#ely outcome is that both of you ill shir#. "f your classmate or#s, youre better off shir#ing, because you ould rather have an overall )a grade andfun* then an overall 6 )an ! grade and no fun*. "f your classmate shir#s, you areindifferent beteen or#ing for an overall G )a grade ith no fun* and shir#ingfor an overall G )a G grade and fun*. 7o your dominant strategy is to shir#. Dourclassmate faces the same payoffs, so ill also shir#. ut if you are li#ely to or#ith the same person again, you have a greater incentive to or#, so that yourclassmate ill or#, so you ill both be better off. "n repeated games,cooperation is more li#ely.

3. ven though the ban on cigarette advertising increased the profits of cigarette companies,it as good public policy because it reduced the quantity of cigarette consumption. 7incecigarette consumption imposes an externality because of its health costs, the reduction inquantity is beneficial.

;. a. The decision box for this game is(

Bra#i$$9s ecisi"#

Ho /rice >igh /rice

,*erica#9

secisi"#

Ho/ric

e

Ho profits for raniff

Ho profits for !merican

Rery lo profits forraniff

>igh /rofits for !merican

>igh

/rice

>igh profits for raniff

Rery lo profits for!merican

4edium profits forraniff

4edium profits for!merican




b. "f raniff sets a lo price, !merican ill set a lo price. "f raniff sets a high price, !merican ill set a lo price. 7o !merican has a dominant strategy to seta lo price.

"f !merican sets a lo price, raniff ill set a lo price. "f !merican sets a high

price, raniff ill set a lo price. 7o raniff has a dominant strategy to set a lo price.

7ince both have a dominant strategy to set a lo price, the Aash equilibrium is for both to set a lo price.

c. ! better outcome ould be for both airlines to set a high price' then they ould both get higher profits. ut that outcome could only be achieved by cooperation)collusion*. "f that happened, consumers ould lose because prices ould behigher and quantity ould be loer.

?. a. "f Lones has 19 cos and 7mith has 19, for a total of 29 cos, each co produces8,999 of mil#. 7ince a co costs 81,999, profits ould be 8$,999 per co, or8$9,999 for each farmer.

"f one farmer had 19 cos and the other farmer had 29 cos, for a total of $9cos, each co produces 8$,999 of mil#. /rofits per co ould be 82,999, so thefarmer ith 19 cos ma#es 829,999' the farmer ith 29 cos ma#es 89,999.

"f both farmers have 29 cos, for a total of 9 cos, each co produces 82,999 ofmil#. /rofit per co is 81,999, so each farmers profit is 829,999. The results areshon in the table(

<"#es= ecisi"#

19 cos 29 cos

S*ith9s

ecisi"#

19cos

8$9,999 profit forLones

8$9,999 profit for7mith

89,999 profit for Lones

829,999 profit for 7mith

29cos

829,999 profit forLones

89,999 profit for7mith

829,999 profit for Lones

829,999 profit for 7mith

b. "f Lones had 19 cos, 7mith ould ant 29 cos. "f Lones had 29 cos, 7mithould be indifferent )get the same profit* if he had 19 or 29 cos. 7o 7mith has adominant strategy of having 29 cos.




"f 7mith had 19 cos, Lones ould ant 29 cos. "f 7mith had 29 cos, Lonesould be indifferent )get the same profit* if he had 19 or 29 cos. 7o Lones has adominant strategy of having 29 cos.

The Aash equilibrium is for each farmer to have 29 cos, since that is the

dominant strategy for each. They each ma#e profits of 829,999. ut they ould both be better off if they cooperated and each had only 19 cos' then profit ould be 8$9,999 each.

c. The problem illustrates ho a common field may be overused, reducing the profits of producers. 7ince people tend to overuse common fields, it is moreefficient for people to on their on portion of the field. Thus, over time,common fields have been divided up and oned privately.

19. Hittle Sona should not believe this threat from ig re because it is not in ig re%sinterest to carry out the threat. "f Hittle Sona enters, ig re can set a high price, in

hich case it ma#es 8$ million, or ig re can set a lo price, in hich case it ma#es81 million. Thus the threat is an empty one, hich Hittle Sona should ignore' HittleSona should enter the mar#et.

11. Aeither player has a dominant strategy in this game. Leff should hit left if 7teve guessesright and Leff should hit right if 7teve guesses left. 7teve should guess left if Leff hits leftand 7teve should guess right if Leff hits right. Thus, if Leff stuc# ith a particularstrategy )left or right*, 7teve ould be able to guess it easily after a fe points. ! betterstrategy for Leff is to randomly choose hether to hit the ball left or right, sometimeshitting left and other times hitting right.


Quick Quizzes

1. The three #ey attributes of monopolistic competition are( )1* there are many sellers' )2*each firm produces a slightly different product' and )$* firms can enter or exit the mar#etfreely.

&igure 1 shos the long-run equilibrium in a monopolistically competitive mar#et. Thisequilibrium differs from that in a perfectly competitive mar#et because price exceeds

marginal cost and the firm doesn%t produce at the minimum point of average total cost.




i!ure 1

2. !dvertising may ma#e mar#ets less competitive because it manipulates people%s tastesrather than being informative. !dvertising gives consumers the perception that there is agreater difference beteen to products than really exists. That ma#es the demand curvefor a product more inelastic, so the firms then charge greater mar#ups over marginal cost.>oever, some advertising could ma#e mar#ets more competitive, since advertising is @ust one more method of competition beteen products and since it sometimes providesuseful information to consumers, alloing them to more easily ta#e advantage of pricedifferences. "n addition, expensive advertising can be a signal of quality. !dvertisingalso allos entry, since advertising can be used to inform consumers about a ne product.

rand names may be beneficial because they provide information to consumers about thequality of goods. They also give firms an incentive to maintain high quality, since theirreputations are important. ut brand names may be criticized because they may simplydifferentiate products that are not really different, as in the case of drugs that are identical but the brand-name drug sells at a much higher price than the generic drug.


1. The three attributes of monopolistic competition are( )1* there are many sellers' )2* eachseller produces a slightly different product' and )$* firms can enter or exit the mar#et

ithout restriction. 4onopolistic competition is li#e monopoly because firms face adonard-sloping demand curve, so price exceeds marginal cost. 4onopolisticcompetition is li#e perfect competition because, in the long run, price equals average totalcost, as free entry and exit drive economic profit to zero.

2. "n &igure 2, a firm has demand curve D1 and marginal-revenue curve MR1. The firm isma#ing profits because at quantity Q1, price ) P 1* is above average total cost ) ATC *.Those profits induce other firms to enter the industry, causing the demand curve to shift




to D2 and the marginal-revenue curve to shift to MR2. The result is a decline in quantityto Q2, at hich point the price ) P 2* equals average total cost ) ATC *, so profits are nozero.

i!ure '

i!ure .

$. &igure $ shos the long-run equilibrium in a monopolistically competitive mar#et. /riceequals average total cost. /rice is above marginal cost.

. 7ince, in equilibrium, price is above marginal cost, a monopolistic competitor producestoo little output. ut this is a hard problem to solve because( )1* the administrative burden of regulating the large number of monopolistically competitive firms ould be




high' and )2* the firms are earning zero economic profits, so forcing them to price atmarginal cost means that firms ould lose money unless the government subsidizedthem.

. !dvertising might reduce economic ell-being because it is costly, manipulates peoples

tastes, and impedes competition by ma#ing products appear more different than theyreally are. ut advertising might increase economic ell-being by providing usefulinformation to consumers and fostering competition.

0. !dvertising ith no apparent informational content might convey information toconsumers if it provides a signal of quality. ! firm ont be illing to spend muchmoney advertising a lo-quality good, but ill be illing to spend significantly moreadvertising a high-quality good.

3. The to benefits that might arise from the existence of brand names are( )1* brand names provide consumers information about quality hen quality cannot be easily @udged in

advance' and )2* brand names give firms an incentive to maintain high quality tomaintain the reputation of their brand names.


1. a. The mar#et for 2 pencils is perfectly competitive since pencils by anymanufacturer are identical and there are a large number of manufacturers.

b. The mar#et for bottled ater is monopolistically competitive because ofconsumers concerns about quality. !s a result, each producer has a slightlydifferent product.

c. The mar#et for copper is perfectly competitive, since all copper is identical andthere are a large number of producers.

d. The mar#et for local telephone service is monopolistic because it is a naturalmonopolyEit is cheaper for one firm to supply all the output.

e. The mar#et for peanut butter is monopolistically competitive because different brand names exist ith different quality characteristics.

f. The mar#et for lipstic# is monopolistically competitive because lipstic# fromdifferent firms differs slightly, but there are a large number of firms ho can enteror exit ithout restriction.

2. ! monopolistic firm produces a product for hich there are no close substitutes, but amonopolistically competitive firm produces a product that is only somehat differentfrom substitute goods. 7o the goods differ in terms of the degree to hich substitutes




exist.

$. 4onopolistically competitive firms dont increase the quantity they produce to loer theaverage cost of production because doing so ould require them to loer their price. Theloss in revenue from the loer price outeighs the benefits of the loer cost of

production.

. a. &igure illustrates the mar#et for 7par#le toothpaste in long-run equilibrium.The profit-maximizing level of output is Q4 and the price is P 4.

i!ure 4

b. 7par#les profit is zero, since at quantity Q4, price equals average total cost.

c. The consumer surplus from the purchase of 7par#le toothpaste is area ! K . Theefficient level of output occurs here the demand curve intersects the marginal-cost curve, at Q6. 7o the deadeight loss is area 6, the area above marginal costand belo demand, from Q4 to Q6.

d. "f the government forced 7par#le to produce the efficient level of output, the firm

ould lose money because average cost ould exceed price, so the firm ouldshut don. "f that happened, 7par#les customers ould earn no consumersurplus.

. 7ince each firm in a monopolistically competitive mar#et produces a product that isslightly different from other products, a monopolistically competitive mar#et has a largenumber of products. ut hether that number is optimal or not depends on to #eyexternalities( the product-variety externality and the business-stealing externality. The




product-variety externality is a positive externality to consumers from the introduction ofa ne product. The business-stealing externality is a negative externality because otherfirms lose customers and profits from the addition of a ne product. 7ince the entrantdoesnt ta#e these externalities into account in deciding hether or not to enter themar#et, it isnt clear hether the actual number of products ill be optimal, above

optimal, or belo optimal.

0. y sending 6hristmas cards to their customers, monopolistically competitive firms areadvertising themselves. 7ince they are in a position in hich price exceeds marginalcost, they ould li#e more customers to come in, as shon in &igure . 7ince the price, P 4, exceeds marginal cost, MC 4, any additional customer ho pays the existing priceincreases the firms profits.

i!ure /

3. "f you ere thin#ing of entering the ice-cream business, you ould ant to ma#e icecream that is slightly different from the existing brands. y differentiating your productfrom others, you gain some mar#et poer.

;. 4any ansers are possible. The ansers should explain that commercials are sociallyuseful to the extent that they provide consumers information about the product ordemonstrate from the existence of the commercial that the product is orth advertising,and thus is not of lo quality. 6ommercials are socially asteful to the extent that they

manipulate peoples tastes and try to ma#e products seem more different than they reallyare.

?. a. ! family-oned restaurant ould be more li#ely to advertise than a family-onedfarm because the output of the farm is sold in a perfectly competitive mar#et, inhich there is no reason to advertise, hile the output of the restaurant is sold in amonopolistically competitive mar#et.




b. ! manufacturer of cars is more li#ely to advertise than a manufacturer of for#lifts because there is little difference beteen different brands of industrial productsli#e for#lifts, hile there are greater perceived differences beteen consumer products li#e cars. The possible return to advertising is greater in the case of carsthan in the case of for#lifts.

c. ! company that invented a reliable atch is li#ely to advertise more than acompany that invented a less reliable atch that costs the same amount to ma#e because the company ith the reliable atch ill get many repeat sales over timeto cover the cost of the advertising, hile the company ith the less reliableatch ill not.

19. a. /erdue created a brand name for chic#en by advertising. y doing so, he asable to differentiate his product from other chic#en, gaining mar#et poer.

b. 7ociety gained to the extent that /erdue has a great incentive to maintain the

quality of his chic#en. 7ociety lost to the extent that the mar#et for chic#en became less competitive, ith the associated deadeight loss.

11. a. &igure 0 shos Tylenols demand, marginal revenue, and marginal cost curves.Tylenols price is P T, its marginal cost is MC T, and its mar#up over marginal costis P T - MC T.

i!ure 0

b. &igure 3 shos the demand, marginal revenue, and marginal cost curves for ama#er of acetaminophen. The diagrams differ in that the acetaminophen ma#erfaces a horizontal demand curve, hile the ma#er of Tylenol faces a donard-sloping demand curve. The acetaminophen ma#er has no mar#up of price overmarginal cost, hile the ma#er of Tylenol has a positive mar#up, because it hassome mar#et poer.




i!ure

c. The ma#er of Tylenol has a bigger incentive for careful quality control, because ifquality ere poor, the value of its brand name ould deteriorate, sales oulddecline, and its advertising ould be orth less.

mnakiw solutionschapter 14-17

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