Download CH14 1.5 Even if there are no direct product substitutes, there still

CH14
1.5
Even if there are no direct product substitutes, there still can be a nearly flat demand
curve. If consumer demand for the product is highly elastic, even if there is only one
producer for the product, that producer will not wield very much monopoly power. A
monopoly can exist even if there are substitutes as long as they are not considered close
substitutes.
2.6
The purpose of patents is to encourage innovation. A patent is a delicate compromise
between the consumer and the producer. For the life of the patent, the innovator can earn
monopoly profit; the consumers can benefit from the new product, albeit at a high
price. After expiration of the patent, competition can lower the price of the good allowing
consumers to benefit from both the new product (benefit of innovation) and the low price
(benefit of competition).
3.4
a. In the short run Comcast will continue to sell 6 subscriptions at $14 each. Its
revenue = $84, but its cost is now $80 + $6, so its loss is $2. If this loss
continues, in the long run Comcast will exit the market.
b. The new tax increases the marginal cost by $0.50 per subscriber, as shown in the
table:
Now Comcast will sell 5 subscriptions.
It will charge a price of $15 per month,
and earn profits of $75.00 – $73.50 = $1.50.
3.10
Profit maximization is generally not the same thing as revenue maximization.
To maximize revenue the firm would produce up to the point where marginal revenue is zero.
Profit maximization occurs at the level of output where marginal revenue equals marginal
cost. Therefore, when marginal cost is zero, revenue maximization is the same as profit
maximization.
4.5
Charging by the gallon is more likely to achieve allocative efficiency – as long as
the price equals the marginal cost. To charge by the gallon, the city has to install a water
meter in each firm or home and employ meter readers to gather information on how many
gallons have been used. Some cities might want to avoid this expense.
4.7
Step 1: Review the chapter material. This problem is about monopoly and economic
efficiency, so you may want to review the section “Does Monopoly Reduce Economic
Efficiency?” which appears on page 480.
Step 2: Answer question (a).
Monopoly results in a loss of consumer surplus equal to sum
of areas A and B in the graph. Area A equals $240,000 [($60 - $40) x 12,000]. Area B
equals $80,000 [1/2 x ($60 - $40) x (20,000 – 12,000)]. Therefore, there is a loss of
consumer surplus equal to $320,000 from monopoly as compared to the perfectly
competitive equilibrium.
Step 3: Answer question (b).
Area A minus area C is the gain in producer surplus that
results from the monopoly price of $60 rather than the perfectly competitive price $40.
Area A equals $240,000. Area C equals $40,000 [1/2 x ($40 - $30) x (20,000 – 12,000)].
Area A minus area C equals $200,000.
Step 4: Answer question (c).
Economic surplus is the total of consumer surplus and
producer surplus. Since area A is a transfer of surplus from consumers to producers it does
not affect the net economic loss. There is a net loss of economic surplus (a deadweight loss)
equal to area B ($80,000) plus area C ($40,000) or $120,000.
5.5
a. To maximize profits, the monopoly will produce the quantity where marginal
revenue equals
marginal cost. So, the monopoly will produce 100 units and charge a price of $90.
b. Its marginal revenue curve is now a flat line at $54, running from the vertical axis
to the demand curve, so the monopoly will produce 65 units and charge a price of
$54. The quantity demanded at a price of $54 is 200, but the quantity supplied is
only 65, so there will be a shortage of 135 units, and some consumers will not be
able to buy the product.
5.13
HHI before the merger: 292 + 222 + 212 + 172 + 82 + 6(0.52) = 2,120.5. The HHI before the
merger is already above 1,800 and the merger would increase the HHI, so the Department of
Justice and Federal Trade Commission opposed the merger. After the merger, the HHI
would have been: 302 + 292 + 212 + 172 + 3 (12) = 2,472.5.
5.15
a. If the software codes for iTunes were publicly available, any improvement Apple
would make in the program would be easily copied and Apple would lose the
benefits of the greater sales they expect due to these improvements. In this case
an investment in a better product would not yield a sufficient return.
b. The French government wishes to reduce monopoly power in the market and
bring about lower prices and less deadweight loss. Doing so, though, might
reduce the incentive for firms to undertake the investments necessary for further
technological progress in the on-line distribution of music.