Part 1:

1. Never Pay Retail Again

Not only has scouring the Web for the best possible price become standard protocol before buying a big-ticket item, but more consumers are employing creative strategies for scoring hot deals. Comparison shopping, haggling and swapping discount codes are all becoming mainstream marks of savvy shoppers... online shoppers can check a comparison service like Price Grabber before making a purchase.

CNN, May 30, 2008

a. Explain the effect of the Internet on the degree of competition in the market.
b. Explain how the Internet influences market efficiency.

Quick Copy is one of the many perfectly competitive copy shops near the campus. Figure shows Quick Copy's cost curves. If the market price of copying a page is 6 cents:

2. calculate Quick Copy's marginal revenue.

3. What is Quick Copy's profit maximizing level of output?

4. What is Quick Copy's economic profit?

5. Should a firm shut down (and why) if its revenue is $1,000 per week, and:

a) its variable cost is $500, and its sunk fixed cost is $600?
b) its variable cost is $1,001, and its sunk fixed cost is $500?

6. Should a firm shut down if its weekly revenue is $1,000, its variable cost is $500, and its fixed cost is $800, of which $600 is avoidable if it shuts down? Why?

7. For Red Delicious apple farmers in the state of Washington, 2001 was a terrible year. The average price for Red Delicious was $10.61 per box, well below the shutdown level of $13.23. Many farmers did not pick the apples off their trees. Other farmers bulldozed their trees getting out of the Red Delicious business for good, taking 25,000 acres out of production.

Why did some farmers choose not to pick apples, and others to bulldoze their trees? (Hint: Consider the average variable cost and expectations about future prices.)

Part 2:

Use the demand schedule that follows to answer questions 1, 2, and 3.

1. Calculate total revenue and marginal revenue at each quantity.

2. Use Chapter 4's total-revenue test for price elasticity to determine at which price levels the demand is elastic and inelastic.

3. Suppose the marginal cost of successive units of output were $3.50. What output would the profit seeking firm produce and what price would the firm charge?

A book publisher initially prices both hardback books and paperback books at $20 per book. The hardback version comes out first, followed two months later by the paperback version. The publisher initially sells the same number of hardbacks and softbacks (100 each). A hardback book costs $3.00 to produce, and a paperback book costs $2.00 to produce.

4. Complete the following table.

5. The price elasticity of demand for hardback buyers is 0.70, and the price elasticity of demand for paperback buyers is 1.6. Suppose the publisher had increased the price for hardbacks by 10 percent and decreased the price of paperbacks by 10 percent. Complete the following table (use the formula: Elasticity = Percent change in quantity demanded divided by the percent change in price)

6. Does price discrimination increase or decrease the publisher's profits? If so, by how much?

Part 3:

Soup Nazi video

Market power is defined as the ability to influence the market, and in particular the market price, by influencing the total quantity offered for sale. A firm does not have to be a monopoly to have market power. Even small firms can have some degree of market power (think of your favorite fast food).

Take a look at this video (link is below) and answer these three questions:

1) What topics that we have discussed is presented in this video?

2) How is that made clear to you in the video?

3) Explain the ending in terms of the material covered in these market structure chapters

4) Did the soup nazi have a monopoly, or did he simply have a lot of market power? (How many places in Manhattan sell soup?)

http://www.youtube.com/watch?v=M2lfZg-apSAShare