Question 1a. How will the marginal and average cost curves of the typical pure competitor shift or change as a result of the following events:
(a) an increase in wages of all labor; (b) an increase in the rental payments on office machinery; (c) a technological advance; (d) an increase in sales taxes; (e) an increase in property taxes; and (f) a decline in the price of a basic raw material?
b. The agricultural market for maize can be characterized as a purely competitive industry. How might the following events affect the short-run cost curves and output for a firm in the industry?
(a) A reduction in the cost of fertilizer that is sold to maize farmers.
(b) The Kenya Revenue Authority (KRA) changes tax laws which increase the amount of depreciation that farmers can deduct for equipment.
(c) The market price of maize falls.
Question 2. In the table below are cost and demand data for a pure monopolist.
|
Quantity demanded
|
Price
|
Marginal revenue
|
Average cost
|
Marginal cost
|
|
0
|
$35.00
|
|
|
|
|
1
|
32.00
|
$ 32.00
|
$48.00
|
$48.00
|
|
2
|
29.00
|
26.00
|
30.00
|
12.00
|
|
3
|
26.00
|
20.00
|
23.34
|
10.00
|
|
4
|
23.00
|
14.00
|
21.00
|
14.00
|
|
5
|
20.00
|
8.00
|
20.00
|
16.00
|
|
6
|
17.00
|
2.00
|
19.50
|
17.00
|
|
7
|
14.00
|
-4.00
|
19.28
|
18.00
|
|
8
|
11.00
|
-10.00
|
18.68
|
18.50
|
|
9
|
8.00
|
-16.00
|
18.72
|
19.00
|
(a) What is the level of price, output, and amount of profit for an unregulated monopolist?
(b) Using the data in the table, what are the price, output, and profit for a regulated monopolist that sets price equal to marginal cost compared with an unregulated monopolist?
(c) Using the data in the table, what are the price, output, and profit for a regulated monopolist that charges a "fair-return" price compared with an unregulated monopolist?
(d) Analyze the effect of regulation on the allocation of resources. Which situation is most efficient? Which situation is most likely to be chosen by government? Why?
Question 3. Assume that the short-run cost and demand data given in the table below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion. Compute the marginal cost and marginal revenue of each unit of output and enter these figures in the table.
|
Output
|
Total cost
|
Marginal cost
|
Quantity demanded
|
Price
|
Marginal revenue
|
|
0
|
$ 75
|
|
0
|
$180
|
|
|
1
|
120
|
$_____
|
1
|
165
|
$_____
|
|
2
|
135
|
_____
|
2
|
150
|
_____
|
|
3
|
165
|
_____
|
3
|
135
|
_____
|
|
4
|
210
|
_____
|
4
|
120
|
_____
|
|
5
|
270
|
_____
|
5
|
105
|
_____
|
|
6
|
345
|
_____
|
6
|
90
|
_____
|
|
7
|
435
|
_____
|
7
|
75
|
_____
|
|
8
|
540
|
_____
|
8
|
60
|
_____
|
|
9
|
660
|
_____
|
9
|
45
|
_____
|
|
10
|
795
|
_____
|
10
|
30
|
_____
|
(a) At what output level and at what price will the firm produce in the short run? What will be the total profit?
(b) What will happen to demand, price, and profit in the long run?
Question 4. The kinked-demand schedule that an oligopolist believes confronts the firm is given in the table below. Compute the oligopolist's total revenue at each of the nine prices, and enter these figures in the table. Also compute marginal revenue for each unit between the nine prices and enter these figures in the table below.
|
Price
|
Quantity demanded
|
Total revenue
|
Marginal revenue per unit
|
|
$5.80
|
50
|
$_____
|
|
|
5.60
|
100
|
_____
|
$_____
|
|
5.40
|
150
|
_____
|
_____
|
|
5.20
|
200
|
_____
|
_____
|
|
5.00
|
250
|
_____
|
_____
|
|
4.80
|
264
|
_____
|
_____
|
|
4.60
|
279
|
_____
|
_____
|
|
4.40
|
288
|
_____
|
_____
|
|
4.20
|
300
|
_____
|
_____
|
(a) Where is the "kink" in the demand curve? What is the current selling price at that kink and how much output will be demanded?
(b) What is the range of marginal cost that will keep the price set at the kink?
b. Consider the following payoff matrix in which the numbers indicate the profit in millions of dollars for a duopoly based either on a high-price or a low-price strategy.
|
|
Firm A
|
|
|
High-price
|
Low-price
|
|
High-price
|
A = $150
B = $150
|
A = $200
B = $ 90
|
|
|
Firm B
|
|
Low-price
|
A = $ 90
B = $200
|
A = $100
B = $100
|
(a) What will be the result when each firm chooses a high-price strategy?
(b) What will be the result when Firm A chooses a low-price strategy while Firm B maintains a high-price strategy?
(c) What will be the result when Firm B chooses a low-price strategy while Firm A maintains a high-price strategy?
(d) What will be the result when each firm chooses a low-price strategy?
(e) What two conclusions can you draw about collusion?