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Unit IV: Imperfect Competition Problem Set #4 Points Distribution 1a. Barriers to Entry -Skip (Gax will grade) 1b. MR=MC Rule • 1 Point- Profit-maximizing point, true for all market structures • 1 Point- Explanation of why MR=MC is the rule (any point beyond the firm is losing money) • 1 Point- Clear example of MR=MC Rule using numbers 1c. Price Discrimination • 1 Point- Definition (charging customers different prices for the same product) • 1 Point- Qualifications (monopoly power, no resell, segregate the market) • 1 Point- Clear example 1d. Socially Optimal Price • 1 Point- P=MC • 1 Point-Allocatively Efficient • 1 Point- Clear example using numbers/graph. 1e. Fair Return Price • 1 Point- P=ATC • 1 point- Zero economic profit/normal profit/TR=TC • 1 Point- Clear example of FRP using numbers or a graph. Problem Set Question #3: Worksheets A Quick Review of PC and Monopoly ½ Point for EACH 1. A 5. C 9. C 2. C 6. D 10. C 3. D 7. A 11. C 4. B 8. C Regulating a Monopoly 1 point-each question (All must be correct) 1. Unregulated A. B. C. D. E. 1500 $4 $6000 $4500 $1500 Profit 2. Socially Optimal (Approx. Ok) A. B. C. D. E. F. G. 3,000 $1.50 $4,500 $7500 $3000 Loss Yes $3000 (amount of the loss) Regulating a Monopoly 1 point-each question (All must be correct) 3. Fair Return A. B. C. D. E. 2500 $2.50 $6250 $6250 Zero Economic Profit 4. If not answered, (-1) 5. If not answered, (-1) Question 4 Price Quantity Demanded Total Revenue Marginal Revenue $11.00 0 0 - 10 1 10 10 9 2 18 8 8 3 24 6 7 4 28 4 6 5 30 2 5 6 30 0 4 7 28 -2 3 8 24 -4 2 9 18 -6 4. Demand, MR, and TR for Monopolies a. Why the MR curve less than the demand curve for all imperfectly competitive firms. • 3 Points- To sell more the firm must lower price It lowers price for ALL units. (It can’t charge people different prices) • 2 Point- SPECIFIC numerical example that proves that the MR is less than the price. b. Plotting MR and TR Curves • 1 Point- correctly plotted demand and marginal revenue curves with D above MR • 1 Point- correctly plotted TR with TR rising then falling • 1 Point- Identifies that elastic range is to the left where MR is positive and inelastic is on the right. • 1 Point- Total Revenue test says that when price falls and TR increases, demand is elastic • 1 Point- Total Revenue test says that when price falls and TR decreases, demand is inelastic Labeled elastic and inelastic ranges. Inelastic Dollars Elastic MR D Dollars Q TR Q 5. Compare AND contrast monopolistic competition and perfect competition • 2 Point (similarities)- perfect comp and mono comp have the following in common: – Many Firms – Easy Entry/Exit – Zero economic profit in LR • 3 Points (differences)-perfect comp and mono comp have the following differences: – MC: controls price; PC: price takers – MC: D>MR; PC: D=MR – MC: advertising used; PC: no advertising – MC: Not All./Prod. Eff. In LR; PC: Both Explain Oligopolies • 2 Point- Identify the characteristics of an Oligopoly (few firms, large control over price, identical/differentiated products, high barriers to entry) • 2 point- Explanation of game theory, ability to collude and incentive to cheat • 1 Point- They explain that the kinked demand curve shows that non-colluding oligopolies match price cuts and ignore price increases.