Economics Homework Nine Answers - Student Four
Read and, if necessary, reread the above lecture. Homework is lighter this week to give you a break after your studying last week. Answer 4 out of these 5 questions:
1.Identify an industry not mentioned in the lecture that is an oligopoly, and explain why.
The laptop industry is an example of an oligopoly industry because there are not that many companies that produce laptops, it is difficult to start this business mostly because of money, and all the laptop companies sell similar goods. By owning a laptop company, you can make a lot of money, but if you were the only company that produced laptops, you could make much more. Because there are some competitors, laptop production is considered an oligopoly industry.
2. Order the types of industries from those having the lowest price (due to the greatest competition) to those having the highest price (due to the least competition).
(A) Perfect competition- there is many buyers and sellers, perfect knowledge and mobility, and many substitutes.
(B) Perfectly Contestable Markets- you may be the only seller, but competition is always threatened.
(C) Oligopoly- few companies, high barriers to enter, similar goods.
(D) Cartel- an agreement between companies, which produce similar goods, that decreases supply and competition.
(E) Monopoly- when you own the whole market of a certain good. You are the only one that produces a certain widget (no competition).
- Excellent! But one type seems to be missing ... monopolistic competition, which falls between (B) and (C) in your list. (Minus 1)
3. Explain which specific type of industry (e.g., oligopoly or something else) each of these quotes probably refers to: (1) "She's the finest hair stylist in town; no one has her special style!", (2) "Crazy Eddie ... his low prices are INSANE!", (3) "Don't like his prices? He's the only one in town selling what you need."
(1) Monopolistic Competition, because there still is competition between similar industries but some have better “quality”.
(2) Perfectly Contestable Markets, because Eddie keeps his prices as low as possible due to the threat of competition.
(3) Monopoly, because it describes that there are no competitors to lower the price of the widget.
- Superb, but (2) is probably perfect competition to force the lowest possible prices. After all, why would he be advertising so aggressively? (Minus 1)
5. What prevents a monopoly from increasing its prices without limitation? The Law of Demand perfectly applies to this answer because if an industry increases its price above what the consumer is willing pay, even if it is the only good available, they will stop buying until the price is decreased. A large portion of the population in the world is middle class and if the industry, which has a monopoly, increases its prices without limitation then only will the wealthy be able to afford their goods. When price increases demand increases.
6. Where is the Nash equilibrium for this set of options, where (x,y) represents the profits to (Firm A, Firm B)? Explain.
Nash equilibrium only exists when each player does not change their strategy while knowing the other opponents’ strategies. One person has to lose while the other gains, so by not changing your strategy you are playing it safe and not taking chances. There is a 50/50 chance of losing money for each and many industries do not want to take a chance that may led to bankruptcy. No one wants to take the first move.
- Correct answer, but I'm not sure your explanation perfectly describes why. But I'll give you full credit and ask you to check the model answers when they are ready.
After answering question 6, then answer two of these three questions:
7. Monopolies: should the government regulate them? Or is regulation worse?
As the Coase theorem illustrates, when government barges into the free market, complications and more transaction costs are the result. The government should let the invisible hand take care of it and not interfere. Great ruckus would occur if the government attempted to end a monopoly. It would cause industries to bankrupt because the more competition the more difficult it is to survive.
- Great work. Note: "to go bankrupt," or "to bankrupt themselves," not "to bankrupt."
9. How does a monopolist maximize his profits?
He must increase his price to what the customers are willing to pay. He needs to direct his price to the middle class, the greatest amount of people, and the maximum they will pay. He must increase the price of each widget until MR=MC.
- Terrific work! 68/70. Highest score in the class so far. Well done!