Economic Study Guide

Economic Study Guide

1. Explain in words why a change in the price of sugar may not cause a change in the price of Pepsi-Cola.
2. Setting prices.   What are the methods that companies use to set prices for their goods and services?
3. What are substitute products

2. In the following matrix for the profits of two pizza firms with the decision whether or not to offer “free delivery” what is the dominant outcome. Explain why.

Rival delivers Rival does not deliver
You deliver Rival gets $3000
You get $3000 Rival gets $5000
You get $4000
You don’t deliver Rival gets $4000
You get $5000 Rival gets $6000
You get $6000

1. Price theories- what factors to put into account when setting prices for goods and services? What constitutes costs – Variable costs versus fixed costs
2. Competition theory- What theories of competition relate to pricing

3. In the following market, is there likely to an investigation by the US Department of Justice for a merger between firm C and firm D? Explain using the HHI.
Market share
Firm A 30%
Firm B 20%
Firm C 10%
Firm D 10%
Then six small firms each with 5% market share)

1. What are anti-trust laws?  What business practises could be subject of litigations
2. Mergers and acquisitions- What are mergers and acquisitions. Controversial mergers in US history and main reason why they were subject for litigation. What are unacceptable mergers and acquisitions
3. What is fair  and acceptable competition; what constitutes acceptable competitive practises

4. If a firm is operating in an oligopoly market, would it prefer for there to be an inelastic or elastic demand if it increases prices? Explain why this is unlikely

to occur.

1. What are oligopolies? What are features of oligopolies and common forms of oligopolies? How do oligopolies determine prices that they charge customers. What influences pricing strategies
2. Demand – what is elastic and inelastic demand

5. In the following situation for an individual firm, what is the profit maximizing level of output. Please show your work and be as precise as possible.

Q P ATC FC
0 x $7

1 $20 $18

2 $16 $15

3 $12 $10

4 $8 $10

5 $4 $12


Formulas to use:- Breakeven Point = Fixed Costs/(Unit Selling Price – Variable Costs)

                          Unit Contribution Margin = Sales Price – Variable Costs

1. What is breakeven point
2. What is margin of safety
3. What are variable costs and fixed costs
4. Theory of the firm

6. Given the following demand curve for selling paintings, and the following costs, what is the maximum profits and output for someone who can perfectly price discriminate? Please show your work.
FC = $2000; cost of each additional painting is $3000

i) Study demand curves , marginal revenue and marginal cost

ii) Total cost=Fixed cost (fc)+ variable cost (vc)

1. Unit Contribution Margin = Sales Price – Variable Costs
2. Profit=Sales-(Fc+vc)

7. If a monopoly cable TV provider needs to put provide an additional free “safety” channel to all customers, what will this do to price and profits. Show in a diagram. (Please show any assumptions about regulations of this monopoly).

i) Study monopolies and monopolistic competition

ii) What are the features of monopolies?

8. If there are economies of scale, what type of monopoly is likely involved? Explain in words why this will cause high barriers to entry.

1. Study the topic on monopolies features  and how they create barriers to market entry

For a monopoly, the MR curve lies ________ the demand (price curve.) Explain in words why this is true.

1. Study about monopolies and how they set prices. The general chapter on demand and pricing policies on monopolies

10The textbook lists “economies of scale” as one entry barrier that maintains monopolies. Explain why this is true.

1. Study on economies and diseconomies of scale. What are economies of scale? What types of companies benefit from economies of scale and how do companies benefit from economies of scale

11What is the difference between a contestable market and a competitive market? Give a real life example of each to explain the difference.

1. Study on contestable market theory, its definition, demand, pricing and explore some examples.
2. Study about competitive market structure

12 If Microsoft is able to reduce the cost of software by distributing it on the internet, rather than selling it in stores, how will this change affect price, quantity and profits. Please show these results in a diagram.

1. Read about the theory of the firm and  the theory of demand and supply

13 If a street artist thinks that customers are have the following demand:

Price $10,000 1

Price $9000 2

Price $8000 3

Price $7000 4

And the fixed cost for her business is $4000, while it costs her $5000 to paint each additional painting, how many paintings should she sell if: a. she price discriminates

b. she does not

i) Study about price discrimination in monopolies and price discrimination economics.

ii) Study about equity pricing, preferential pricing, and tiered pricing.

1. Read about pricing strategies
2. Read about different degrees of price discrimination

14. If a monopoly faces an increase in fixed cost, what will happen to price, quantity produced and profits? Show this result in a diagram.

i) Read about monopolies and competitive markets; price discrimination; sources of monopoly power etc.

15. A real estate agent has fixed costs of $2,000 and variable costs of $6,000 for each parcel of land she sells. If the demand curve is as follows, what will be her  profits if she can perfectly price discriminate. Please show your work.

P = 10,000, Q = 1; p = $9000, Q = 2; P = $8000, Q = 3;P = $7000, Q = 4

Formula to calculate profits is =P*Q-Fixed costs-variable costs.

Study on price discrimination and how to calculate profits under price discrimation        

In the example, above what will be quantity sold, price and profit if the monopoly does not price discriminate?

Study on price discrimination under monopolies

16. Draw a diagram showing a monopoly with a loss in the short run. When might this occur in the real world?

Study about monopolies economics-demand curves and pricing strategies under monopilistc conditions

17If there is sudden increase in the price of chocolate used in candy bars (for which the market is dominated by Hershey’s, Mars and Nestles), why won’t there be an increase in the price of candy bars. Explain carefully in words, not with a diagram.

1. Study on monopolistic competitive markets , study competitive market theory, study about oligopolistic market theories

18. Using labels on a diagram “elastic” and “inelastic” explain why identical prices often occur in an oligopoly.

i) Study about oligopolies, characteristics of oligopolies, demand curve in oligopolies and its behaviour

19 In the baby food market, prices did not increase when all firms were required to put safety seals on their bottles and cans. Explain this result in words.

1. The firms in this market were probably oligopolies. Study about characteristics about oligopolies, demand curves in markets dominated by oligopolies

20 The book lists several barriers to entry that are common in oligopoly markets. Describe two of them and explain how they act as barriers to entry.

1. Study  about oligopolies, oligopoly characteristics, demand curve for oligopolies and how it behaves

21 Which type of merger occurred when Ralphs and Lucky supermarkets planned to merger? What will this do to the market structure? What do you predict will happen to prices, profits and output? What type of merger is this?

Read about merger definition, study about the various types of mergers, read about the causes of mergers, read about oligopolies and monopolistic market structures and demand curves.

22. In the following matrix, what is the dominant outcome? Why?

Rival advertises Rival does not advertise

Rival gets $7 million

You get $7 million Rival gets $5 million

You get $20 million

Rival gets $20 million

You get $5 million Rival gets $12 million

You get $12 million

You advertise

You don’t ad

1. Study about monopolies, characteristics of monopolies and the demand curve under monopolistic market structure
2. Study also about oligopolies, characteristics of oligopolies, and demand curve under oligopolistic market structures

23In the local fast food market, imagine that the market shares are:

Subway: 20%; McDonalds 20%; KFC 10%; Pizza Hut 10%; Carls 10%; Burger King 10%; In and out 10%; Quizno 10%.

Would the Department of Justice investigate a merger between Pizza Hut and Burger King? Why or why not?

What type of merger is this?

1. Study on mergers and acquisitions, types of mergers, characteristics of mergers, main causes of mergers and main players in mergers
2. Read about competition laws in the US and the competition principle
3. Study on US antitrust laws, read on cases brought before courts on mergers and acquisitions
4. Study on anti competition laws and the USA cases on anti competitive behavior

24 In a natural monopoly, what will happen to price and quantity if the good or service is not regulated by the government? Show in a diagram.

What is the best way to regulate this market? Why?

1. Study on monopolies, types of monopolies, characteristics of monopolies, demand curve under monopolistic conditions,
2. Read about natural monopolies, characteristics of natural monopolies, examples of natural monopolies, pricing strategies under monopolies etc

25 Give a real life example of a vertical merger and a conglomerate merger. Why aren’t these mergers as likely to be investigated by the US Department of Justice?  Nonetheless, what possible problems do they present for consumers?

1. Study on mergers , features of mergers, government policy guidelines on mergers, types of mergers and causes of mergers
2. Study about different types of mergers, what are conglomerate and vertical mergers, study about US completion law,

26. Given the following situation, is there a dominant outcome? Why?

Your rival

Goes High Goes Low

Rival gets $7,000

You get $7,000 Rival gets $11,000

You get $4,000

Rival gets $4,000

You get $11,000 Rival gets $6,000

You get $6,000

You go high

You go low

1. Study about oligopolistic market structures, characteristics of oligopolies, read about demand curve in an oligopolistic market structure

27 Explain in words why government regulation may be needed for a natural monopoly. How specifically should the government regulate this monopoly and what might prevent this regulation from working as you might like?

i) What are natural monopolies, what cause natural monopolies, what is the demand curve like in a natural monopoly?

28. In the follow situation for a monopolistically competitive firm in the short run, what is the profit maximizing level of output. Please show your work and be as precise as possible.

Q P FC MC______________________________________

0 $16

$14

1 $30

$16

2 $27

$18

3 $24

$21

4 $21

Read about monopolies, demand curve under monopolies, characteristics of monopolies etc

29. Would you expect prices to rise if a formerly monopolistically competitive nail salon market was turned into a chain franchise with an oligopolistic market structure? Why?

I) what is a monopoly and what is a oligopoly, what are the differences between a monopoly and a oligopoly. How do the demand curves of monopolies look like as compared to oligopolies? What are the pricing strategies for oligopolies as compared to monopolies?

30. What are the relative advantages of buying a good or service produced by a firm in an oligopoly market structure versus the relative advantages of buying a good or service by a firm in a monopolistically competitive market structure?

What are the determinants of supply and demand in oligopolies as opposed to monopolies? What is the difference between a monopoly and an oligopoly?

31. Draw a careful diagram showing a monopolistically competitive firm in the long run. Show clearly profit maximization, TR, TC and profits.

i) What is a monopoly’s price maximization curve? Demand and supply curve for monopolies

32If a monopoly faces an increase in variable cost, what will happen to price, quantity produced and profits? Show this result in a diagram.

1. Monopolies profit maximization curve
2. At  profit maximisation level , MC = MR,  whereas  output is Q and price  is given as P.

33The book lists “nonprice competition” as a major barrier to entry in oligopoly markets. Explain why this is true using a real life example.

1. What are oligopolies and what are their characteristics? Barriers to entry in oligopolies

34If there are economies of scale in a market, what type of monopoly is most likely to occur? What do you expect to happen to price, profit, quantity and efficiency if this market is not regulated? Why?

What is the best way to regulate this market? Why?

1. Monopolies characteristics, regulation of monopolies, types of monopolies, demand and price maximization curves for monopolies, monopoly power, types of monopolies

35 Which type of merger (horizontal, vertical, or conglomerate) is most often challenged the US Department of Justice? Why? Which type is most common in recent US history?

1. What are mergers, types of mergers, causes, common types of mergers in the USA
2. Competition law in the USA, examples of cases involving mergers in the USA

36 In the following market, there is a proposed merger between firms A and B. Will this likely be challenged by the US Department of Justice? Explain by using the HHI

rule.

Market share

Firm A 20%

Firm B 10%

Firm C 40%

Firm D 10%

Firm E 20%

1. What are mergers, What are the cause of mergers, competition law in the US,  Cases involving mergers in the US

37 If a street artist thinks that customers are have the following demand:

Price $100 Quantity demanded 1

Price $80 Quantity demanded 2

Price $60 Quantity demanded 3

Price $40 Quantity demanded 4

And the fixed cost for her business is $80, while it costs her $50 to paint each additional painting, how many paintings should she sell if she can perfectly price discriminate?

Price discrimination, monopolistic price discrimination, demand curve

Law of demand and supply

38 If a firm is operating in an oligopoly market, would it prefer for there to be an elastic or inelastic demand if it decreases prices? Explain why this is unlikely to occur.

1. Price setting mechanism in a oligopoly
2. Characteristics of oligopolies
3. Demand curve under oligopolies

39 Draw a two firm game theory matrix in which each firm has the choice of offering a discount or not offering a discount. In the matrix make up numbers for each firm’s profits so that there is a dominant outcome that both firms offer the discount.

i) What is game theory? What are its main features?  How does it apply to modern business transactions?

40. In the follow situation for a monopoly firm in the short run, what is the profit maximizing level of output. Please show your work and be as precise as possible.

Q P FC MC______________________________________

0 $15

$2

1 $20

$3

2 $16

$4

3 $12

$7

4 $9

Price maximization curve

1. At  profit maximisation level , MC = MR,  whereas  output is Q and price  is given as P.

Interpretation of the above curve

41. Explain in words why a monopolistically competitive firm will be inefficient in the long run.

What is a monopolistically competitive firm? What is monopolistic competition, what are the features of a monopolistically competitive firm

References

Monopoly