CFA课后习题：经济学

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Reading12■TopicsinDemandandSupplyAnalysis

50

PRACTICEPROBLEMS

1

2

Ifthepriceelasticitycoefficientofthedemandcurveforpaperclipsisequalto

–1,demandis:

A

B

C

elastic.

inelastic.

unitelastic.

edemandformembershipatalocalhealthclubisdeterminedbythefollow-

ingequation:

d

Q

=400−5P

hm

hm

whereQdisthenumberofhealthclubmembersandPisthepriceof

hm

hm

membership.Ifthepriceofhealthclubmembershipis$35,thepriceelasticity

ofdemandisclosestto:

A

B

C

–0.778.

–0.500.

–0.438.

3

4

5

Priceelasticityofdemandforagoodwillmostlikelybegreaterif:

A

B

C

therearenosubstitutesforthegood.

consumersconsiderthegoodasdiscretionary.

consumersspendasmallportionoftheirbudgetonthegood.

Iftheincomeelasticityofdemandforaproductis–0.6,a:

A

B

C

1%increaseinincomewillresultina0.6%increaseindemand.

1%increaseinincomewillresultina0.6%decreaseindemand.

0.6%increaseinincomewillresultina1%decreaseindemand.

Anindividual’sdemandforonionsisgivenbythefollowingequation:

d

Q=3−0.05P+0.009I−0.16P

o

o

t

d

whereQoisthenumberofonionsdemanded,Pisthepriceperpoundof

o

onions,Iisthehouseholdincome,andPisthepriceperpoundoftomatoes.

t

Ifthepriceofonionsis$1.25,householdincomeis$2,500,andthepriceof

tomatoesis$3.75,thecross-priceelasticityofdemandforonionswithrespect

tothepriceoftomatoesisclosestto:

A

B

C

–1.0597.

–0.0242.

–0.0081.

6

MovementalongthedemandcurveforgoodXoccursduetoachangein:

A

B

C

income.

thepriceofgoodX.

thepriceofasubstituteforgoodX.

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PracticeProblems

51

7

Awirelessphonemanufacturerintroducedanext-generationphonethat

receivedahighlevelofpositivepublicity.Despiterunningseveralhigh-speed

productionassemblylines,themanufacturerisstillfallingshortinmeeting

demandforthephoneninemonthsafterintroduction.Whichofthefollowing

statementsisthemostplausibleexplanationforthedemand/supplyimbalance?

A

B

C

ephonepriceislowrelativetotheequilibriumprice.

Competitorsintroducednext-generationphonesatasimilarprice.

Consumerincomesgrewfasterthanthemanufactureranticipated.

ThefollowinginformationrelatestoQuestions

8–11

emarketdemandfunctionforfour-yearprivateuniversitiesisgivenbytheequation

d

Q

=84–3.1Ppr+0.8I+0.9Ppu

pr

whereQdisthenumberofapplicantstoprivateuniversitiesperyearinthousands,

pr

P

istheaveragepriceofprivateuniversities(inthousandsofUSD),Iisthehousehold

pr

monthlyincome(inthousandsofUSD),andPistheaveragepriceofpublic

pu

(government-supported)universities(inthousandsofUSD).AssumethatPisequal

to38,Iisequalto100,andPpuisequalto18.

pr

8

epriceelasticityofdemandforprivateuniversitiesisclosestto:

A

B

C

–3.1.

–1.9.

0.6.

9

eincomeelasticityofdemandforprivateuniversitiesisclosestto:

A

B

C

0.5.

0.8.

1.3.

10ecross-priceelasticityofdemandforprivateuniversitieswithrespecttothe

priceofpublicuniversitiesisclosestto:

A

B

C

0.3.

3.1.

3.9.

11Ifthecross-priceelasticitybetweentwogoodsisnegative,thetwogoodsare

classifiedas:

A

B

C

normal.

substitutes.

complements.

12Inthecaseofanormalgoodwithadecreaseinownprice,whichofthefollow-

ingstatementsismostlikelytrue?

A

Boththesubstitutionandincomeeffectsleadtoanincreaseinthequantity

purchased.

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Reading12■TopicsinDemandandSupplyAnalysis

52

B

C

esubstitutioneffectleadstoanincreaseinthequantitypurchased,while

theincomeeffecthasnoimpact.

esubstitutioneffectleadstoanincreaseinthequantitypurchased,while

theincomeeffectleadstoadecrease.

13ForaGiffengood,the:

A

B

C

demandcurveispositivelysloped.

substitutioneffectoverwhelmstheincomeeffect.

incomeandsubstitutioneffectsareinthesamedirection.

14Normalprofitisbestdescribedas:

A

B

C

zeroeconomicprofit.

totalrevenueminusallexplicitcosts.

thesumofaccountingprofitpluseconomicprofit.

15Acompanyplanstohireadditionalfactoryemployees.Intheshortrun,mar-

ginalreturnsaremostlikelytodecreaseif:

A

B

C

thefactoryisoperatingatfullcapacity.

thefactoryisexperiencingalaborshortage.

workersarerequiredtomultitaskandshareduties.

16eproductionrelationshipbetweenthenumberofmachinehoursandtotal

productforacompanyispresentedbelow.

MachineHours

TotalProduct

AverageProduct

1

2

3

4

5

3

8

14

19

21

3.00

4.00

4.67

4.75

4.20

Diminishingmarginalreturnsfirstoccurbeyondmachinehour:

A

B

C

3.

4.

5.

17emarketingdirectorforaSwissspecialtyequipmentmanufacturerestimates

thefirmcansell200unitsandearntotalrevenueofCHF500,000.However,if

250unitsaresold,revenuewilltotalCHF600,000.emarginalrevenueper

unitassociatedwithmarketing250unitsinsteadof200unitsisclosestto:

A

B

C

CHF2,000.

CHF2,400.

CHF2,500.

18Anagriculturalfirmoperatinginaperfectlycompetitivemarketsupplieswheat

tomanufacturersofconsumerfoodproductsandanimalfeeds.Ifthefirmwere

abletoexpanditsproductionandunitsalesby10%themostlikelyresultwould

be:

A

B

C

a10%increaseintotalrevenue.

a10%increaseinaveragerevenue.

anincreaseintotalrevenueoflessthan10%.

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PracticeProblems

53

19Anoperatorofaskiresortisconsideringofferingpricereductionsonweekday

skipasses.Atthenormalpriceof€50perday,300customersareexpectedto

buypasseseachweekday.Atadiscountedpriceof€40perday450customers

areexpectedtobuypasseseachweekday.emarginalrevenuepercustomer

earnedfromofferingthediscountedpriceisclosestto:

A

B

C

€20.

€40.

€50.

20emarginalrevenueperunitsoldforafirmdoingbusinessunderconditions

ofperfectcompetitionwillmostlikelybe:

A

B

C

equaltoaveragerevenue.

lessthanaveragerevenue.

greaterthanaveragerevenue.

ThefollowinginformationrelatestoQuestions

21–23

Afirm’sdirectorofoperationsgathersthefollowinginformationaboutthefirm’scost

structureatdifferentlevelsofoutput:

Exhibit1

Quantity

TotalFixedCost

TotalVariableCost

(Q)

(TFC)

(TVC)

0

1

2

3

4

5

200

200

200

200

200

200

0

100

150

200

240

320

21RefertothedatainExhibit1.Whenquantityproducedisequalto4units,the

averagefixedcost(AFC)isclosestto:

A

B

C

50.

60.

110.

22RefertothedatainExhibit1.Whenthefirmincreasesproductionfrom4to5

units,themarginalcost(MC)isclosestto:

A

B

C

40.

64.

80.

23RefertothedatainExhibit1.elevelofunitproductionresultinginthelow-

estaveragetotalcost(ATC)isclosestto:

A

3.

54

Reading12■TopicsinDemandandSupplyAnalysis

B

C

4.

5.

24eshort-termbreakevenpointofproductionforafirmoperatingunderper-

fectcompetitionwillmostlikelyoccurwhen:

A

B

C

priceisequaltoaveragetotalcost.

marginalrevenueisequaltomarginalcost.

marginalrevenueisequaltoaveragevariablecosts.

25eshort-termshutdownpointofproductionforafirmoperatingunderper-

fectcompetitionwillmostlikelyoccurwhen:

A

B

C

priceisequaltoaveragetotalcost.

marginalrevenueisequaltomarginalcost.

marginalrevenueisequaltoaveragevariablecosts.

26Underconditionsofperfectcompetition,acompanywillbreakevenwhenmar-

ketpriceisequaltotheminimumpointofthe:

A

B

C

averagetotalcostcurve.

averagevariablecostcurve.

short-runmarginalcostcurve.

27Acompanywillshutdownproductionintheshortruniftotalrevenueisless

thantotal:

A

B

C

fixedcosts.

variablecosts.

opportunitycosts.

28Acompanyhastotalvariablecostsof$4millionandfixedcostsof$3million.

Basedonthisinformation,thecompanywillstayinthemarketinthelongterm

iftotalrevenueisatleast:

A

B

C

$3.0million.

$4.5million.

$7.0million.

29Whentotalrevenueisgreaterthantotalvariablecostsbutlessthantotalcosts,

intheshorttermafirmwillmostlikely:

A

B

C

exitthemarket.

stayinthemarket.

shutdownproduction.

30Aprofitmaximumisleastlikelytooccurwhen:

A

B

C

averagetotalcostisminimized.

marginalrevenueequalsmarginalcost.

thedifferencebetweentotalrevenueandtotalcostismaximized.

31Afirmthatincreasesitsquantityproducedwithoutanychangeinper-unitcost

isexperiencing:

A

B

C

economiesofscale.

diseconomiesofscale.

constantreturnstoscale.

32Acompanyisexperiencingeconomiesofscalewhen:

PracticeProblems

55

A

B

C

costperunitincreasesasoutputincreases.

itisoperatingatapointontheLRACcurvewheretheslopeisnegative.

Itisoperatingbeyondtheminimumpointonthelong-runaveragetotalcost

curve.

33Diseconomiesofscalemostlikelyresultfrom:

A

B

C

specializationinthelaborforce.

overlapofbusinessfunctionsandproductlines.

discountedpricesonresourceswhenbuyinginlargerquantities.

34Afirmisoperatingbeyondminimumefficientscaleinaperfectlycompetitive

industry.Tomaintainlong-termviabilitythemostlikelycourseofactionforthe

firmisto:

A

B

C

operateatthecurrentlevelofproduction.

increaseitslevelofproductiontogaineconomiesofscale.

decreaseitslevelofproductiontotheminimumpointonthelong-runaver-

agetotalcostcurve.

35Underconditionsofperfectcompetition,inthelongrunfirmswillmostlikely

earn:

A

B

C

normalprofits.

positiveeconomicprofits.

negativeeconomicprofits.

ThefollowinginformationrelatestoQuestions36

and37

emanagerofasmallmanufacturingfirmgathersthefollowinginformationabout

thefirm’slaborutilizationandproduction:

Exhibit2

Labor(L)

TotalProduct(TP)

0

1

2

3

4

5

0

150

320

510

660

800

36RefertothedatainExhibit2.enumberofworkersresultinginthehighest

levelofaverageproductoflaborisclosestto:

A

B

C

3.

4.

5.

56

Reading12■TopicsinDemandandSupplyAnalysis

37RefertothedatainExhibit2.emarginalproductoflabordemonstrates

increasingreturnsforthefirmifthenumberofworkersisclosesttobutnot

morethan:

A

B

C

2.

3.

4.

Solutions

57

SOLUTIONS

1

2

Ciscorrect.Whenthepriceelasticityofdemandcoefficientis–1,demandis

saidtobeunitelastic,orunitaryelastic.

Aiscorrect.Insertingthepriceof$35intothedemandfunction,quantity

demandediscalculatedas

d

Q

=400−5(35)=225

hm

Atapriceof$35perhealthclubmembership,theelasticityofdemandis

(

d

)(

d

)

Q

hm

Priceelasticityofdemand=∆Q

∆P×P

hm

hm

hm

Priceelasticityofdemand=–5×(35/225)=–0.778

3

4

Biscorrect.Priceelasticityofdemandislikelytobegreaterforitemsthatare

seenasoptionalordiscretionary.

Biscorrect.Incomeelasticityisameasureofhowsensitivequantitydemanded

istoachangeinincome.Iftheincomeelasticityofdemandfortheproductis

–0.6,wheneverincomeincreasesby1%,thequantitydemandedoftheproduct

ateachpricedecreasesby0.6%.Consequently,asincomerises,consumerswill

purchaselessoftheproduct.

5

Biscorrect.ecross-priceelasticityofdemandmeasurestheresponsiveness

ofthedemandforonionsinresponsetoachangeinthepriceoftomatoes.

Fromthedemandfunctionequation:

d

Q

=3–0.05P+0.009I–0.16P

ot

o

d

Q

=3–0.05(1.25)+0.009(2,500)–0.16(3.75)=24.8375

o

Atapriceofonionsof$1.25andapriceoftomatoesof$3.75,thecross-price

elasticityofdemandiscalculatedasfollows:

(

d

)(

d

)

Cross-priceelasticityofdemand=∆Q∆P×PQ

o

o

t

t

Cross-priceelasticityofdemand=–0.16×(3.75/24.8375)=–0.0242

6

7

Biscorrect.edemandcurveshowsquantitydemandedasafunctionofown

priceonly.

Aiscorrect.esituationdescribedisoneofexcessdemandbecause,inorder

formarketstoclearatthegivenlevelofquantitysupplied,thecompanywould

needtoraiseprices.

8

Biscorrect.Fromthedemandfunction:

SolveforQd

:

pr

d

∆Q∆Ppr=–3.1(thecoefficientinfrontofownprice)

pr

d

Q

=84–3.1Ppr+0.8I+0.9Ppu

pr

=84–3.1(38)+0.8(100)+0.9(18)

=62.4

58

Reading12■TopicsinDemandandSupplyAnalysis

AtPpr=38,

priceelasticityofdemand=∆Q

(

d

∆Ppr)(Ppr

d

)

Q

pr

pr

=(–3.1)(38/62.4)

=–1.9

9

Ciscorrect.Fromthedemandfunction:

SolveforQd

:

pr

d

∆Q∆I=0.8(coefficientinfrontoftheincomevariable)

pr

d

Q

=84–3.1Ppr+0.8I+0.9Ppu

pr

=84–3.1(38)+0.8(100)+0.9(18)

=62.4

AtI=100,

(

d

)(

d

)

theincomeelasticityofdemand=∆Q∆IIQ

pr

pr

=(0.8)(100/62.4)

=1.3

10Aiscorrect.Fromthedemandfunction:

SolveforQd

:

pr

d

∆Q∆Ppu=0.9(thecoefficientinfrontofPpu

)

pr

d

Q

=84–3.1Ppr+0.8I+0.9Ppu

pr

=84–3.1(38)+0.8(100)+0.9(18)

=62.4

AtP=38,andPpu=18,

thecross-priceelasticityofdemand=∆Q

(

d

∆Ppu)(Ppu

d

)

Q

pr

pr

=(0.9)(18/62.4)

=0.3

11Ciscorrect.Withcomplements,consumptiongoesupordowntogether.With

anegativecross-priceelasticity,asthepriceofonegoodgoesup,thedemand

forbothfalls.

12Aiscorrect.Inthecaseofnormalgoods,theincomeandsubstitutioneffects

arereinforcing,leadingtoanincreaseintheamountpurchasedafteradropin

price.

13Aiscorrect.eincomeeffectoverwhelmsthesubstitutioneffectsuchthatan

increaseinthepriceofthegoodresultsingreaterdemandforthegood,result-

inginapositivelyslopeddemandcurve.

14Aiscorrect.Normalprofitisthelevelofaccountingprofitsuchthatimplicit

opportunitycostsarejustcovered;thus,itisequaltoalevelofaccounting

profitsuchthateconomicprofitiszero.

15Aiscorrect.elawofdiminishingreturnsoccursintheshortrunwhenaddi-

tionaloutputfallsasmoreandmorelaborisaddedtoafixedamountofcapital.

Whenafactoryisoperatingatfullcapacity,addingadditionalemployeeswill

Solutions

59

notincreaseproductionbecausethephysicalplantisalready100%employed.

Morelaborhourswilladdtocostswithoutaddingtooutput,thusresultingin

diminishingmarginalreturns.

16Aiscorrect.Diminishingmarginalreturnsoccurwhenthemarginalproductof

aresourcedecreasesasadditionalunitsofthatinputareemployed.Marginal

product,whichistheadditionaloutputresultingfromusingonemoreunitof

input,ispresentedbelow.

MachineHours

TotalProduct

AverageProduct

MarginalProduct

1

2

3

4

5

3

8

14

19

21

3.00

4.00

4.67

4.75

4.20

3

5

6

5

2

emarginalproductofthethirdmachinehouris6anddeclinesthereafter.

Consequently,diminishingmarginalreturnsarefirstevidentbeyondthree

machinehours.

17Aiscorrect.Marginalrevenueperunitisdefinedasthechangeintotalrevenue

dividedbythechangeinquantitysold.MR=∆TR÷∆Q.Inthiscase,change

intotalrevenueequalsCHF100,000,andchangeintotalunitssoldequals50.

CHF100,000÷50=CHF2,000.

18Aiscorrect.Inaperfectlycompetitivemarket,anincreaseinsupplybyasingle

firmwillnotaffectprice.erefore,anincreaseinunitssoldbythefirmwillbe

matchedproportionatelybyanincreaseinrevenue.

19Aiscorrect.Marginalrevenueperunitisdefinedasthechangeintotalrev-

enuesdividedbythechangeinquantitysold.MR=∆TR÷∆Q.Inthiscase,

changeintotalrevenueperdayequals€3,000[(450×€40)–(300×€50)],and

changeinunitssoldequals150(450–300).€3,000÷150=€20.

20Aiscorrect.Underperfectcompetition,afirmisapricetakeratanyquantity

suppliedtothemarket,andAR=MR=Price.

21Aiscorrect.Averagefixedcostisequaltototalfixedcostdividedbyquantity

produced:AFC=TFC/Q=200/4=50.

22Ciscorrect.Marginalcostisequaltothechangeintotalcostdividedbythe

changeinquantityproduced.MC=∆TC/∆Q=80/1=80.

23Ciscorrect.Averagetotalcostisequaltototalcostdividedbyquantitypro-

duced.At5unitsproducedtheaveragetotalcostis104.ATC=TC/Q=520/5=

104.

24Aiscorrect.Underperfectcompetition,priceequalsmarginalrevenue.Afirm

breaksevenwhenmarginalrevenueequalsaveragetotalcost.

25Ciscorrect.efirmshouldshutdownproductionwhenmarginalrevenueis

lessthanaveragevariablecost.

26Aiscorrect.Acompanyissaidtobreakevenifitstotalrevenueisequaltoits

totalcost.Underconditionsofperfectcompetition,acompanywillbreakeven

whenmarketpriceisequaltotheminimumpointoftheaveragetotalcost

curve.

27Biscorrect.Acompanywillshutdownproductionintheshortrunwhentotal

revenueisbelowtotalvariablecosts.

60

Reading12■TopicsinDemandandSupplyAnalysis

28Ciscorrect.Acompanywillstayinthemarketinthelongtermiftotalrevenue

isequaltoorgreaterthantotalcost.Becausetotalcostsare$7million($4mil-

lionvariablecostsand$3millionfixedcosts),thecompanywillstayinthe

marketinthelongtermiftotalrevenueequalsatleast$7million.

29Biscorrect.Whentotalrevenueisenoughtocovervariablecostsbutnottotal

fixedcostsinfull,thefirmcansurviveintheshortrunbutwouldbeunableto

maintainfinancialsolvencyinthelongrun.

30Aiscorrect.equantityatwhichaveragetotalcostisminimizeddoesnot

necessarilycorrespondtoaprofitmaximum.

31Ciscorrect.Outputincreasesinthesameproportionasinputincreasesoccur

atconstantreturnstoscale.

32Biscorrect.Economiesofscaleoccurif,asthefirmincreasesoutput,costper

unitofproductionfalls.Graphically,thisdefinitiontranslatesintoalong-run

averagecostcurve(LRAC)withanegativeslope.

33Biscorrect.Asthefirmincreasesoutput,diseconomiesofscaleandhigher

averagetotalcostscanresultwhenthereisoverlapandduplicationofbusiness

functionsandproductlines.

34Ciscorrect.efirmoperatingatgreaterthanlong-runefficientscaleissub-

jecttodiseconomiesofscale.Itshouldplantodecreaseitslevelofproduction.

35Aiscorrect.Competitionshoulddrivepricesdowntolong-runmarginalcost,

resultinginonlynormalprofitsbeingearned.

36Aiscorrect.reeworkersproducethehighestaverageproductequalto170.

AP=510/3=170.

37Biscorrect.Marginalproductisequaltothechangeintotalproductdivided

bythechangeinlabor.eincreaseinMPfrom2to3workersis190:MP=

∆TP/∆L=(510–320)/(3–2)=190/1=190.

108

Reading13■TheFirmandMarketStructures

PRACTICEPROBLEMS

1

2

3

4

Amarketstructurecharacterizedbymanysellerswitheachhavingsomepric-

ingpowerandproductdifferentiationisbestdescribedas:

A

B

C

oligopoly.

perfectcompetition.

monopolisticcompetition.

Amarketstructurewithrelativelyfewsellersofahomogeneousorstandardized

productisbestdescribedas:

A

B

C

oligopoly.

monopoly.

perfectcompetition.

Marketcompetitorsareleastlikelytouseadvertisingasatoolofdifferentiation

inanindustrystructureidentifiedas:

A

B

C

monopoly.

perfectcompetition.

monopolisticcompetition.

UpsilonNaturalGas,Inc.isamonopolyenjoyingveryhighbarrierstoentry.

Itsmarginalcostis$40anditsaveragecostis$70.Arecentmarketstudyhas

determinedthepriceelasticityofdemandis1.5.ecompanywillmostlikely

setitspriceat:

A

B

C

$40.

$70.

$120.

5

edemandscheduleinaperfectlycompetitivemarketisgivenbyP=93–

1.5Q(forQ≤62)andthelong-runcoststructureofeachcompanyis:

Totalcost:

Averagecost:

Marginalcost:

256+2Q+4Q2

256/Q+2+4Q

2+8Q

Newcompanieswillenterthemarketatanypricegreaterthan:

A

B

C

8.

66.

81.

6

7

Companiesmostlikelyhaveawell-definedsupplyfunctionwhenthemarket

structureis:

A

B

C

oligopoly.

perfectcompetition.

monopolisticcompetition.

Aquarius,Inc.isthedominantcompanyandthepriceleaderinitsmarket.One

oftheothercompaniesinthemarketattemptstogainmarketsharebyunder-

cuttingthepricesetbyAquarius.emarketshareofAquariuswillmostlikely:

A

increase.

decrease.

B

©2011CFAInstitute.Allrightsreserved.

PracticeProblems

109

C

staythesame.

8

SigmaSoftandetaTecharethedominantmakersofcomputersystemsoft-

ware.emarkethastwocomponents:alargemass-marketcomponentin

whichdemandispricesensitive,andasmallerperformance-orientedcom-

ponentinwhichdemandismuchlesspricesensitive.SigmaSoft’sproductis

consideredtobetechnicallysuperior.Eachcompanycanchooseoneoftwo

strategies:

Openarchitecture(Open):Massmarketfocusallowingothersoftwarevend-

erstodevelopproductsforitsplatform.

●■

Proprietary(Prop):Allowonlyitsownsoftwareapplicationstorunonits

platform.

●■

Dependinguponthestrategyeachcompanyselects,theirprofitswouldbe:

SigmaSoft–Open

SigmaSoft–Prop

400

650

600

700

ThetaTech–Open

ThetaTech–Open

SigmaSoft–Open

SigmaSoft–Prop

800

600

300

400

ThetaTech–Prop

ThetaTech–Prop

eNashequilibriumforthesecompaniesis:

A

B

C

proprietaryforSigmaSoftandproprietaryforetaTech.

openarchitectureforSigmaSoftandproprietaryforetaTech.

proprietaryforSigmaSoftandopenarchitectureforetaTech.

9

Acompanydoingbusinessinamonopolisticallycompetitivemarketwillmost

likelymaximizeprofitswhenitsoutputquantityissetsuchthat:

A

B

C

averagecostisminimized.

marginalrevenueequalsaveragecost.

marginalrevenueequalsmarginalcost.

10Oligopolisticpricingstrategymostlikelyresultsinademandcurvethatis:

A

B

C

kinked.

vertical.

horizontal.

11Collusionislesslikelyinamarketwhen:

A

B

C

theproductishomogeneous.

companieshavesimilarmarketshares.

thecoststructuresofcompaniesaresimilar.

12Ifcompaniesearneconomicprofitsinaperfectlycompetitivemarket,overthe

longrunthesupplycurvewillmostlikely:

A

B

C

shifttotheleft.

shifttotheright.

remainunchanged.

110

Reading13■TheFirmandMarketStructures

13Overtime,themarketshareofthedominantcompanyinanoligopolisticmar-

ketwillmostlikely:

A

B

C

increase.

decrease.

remainthesame.

14Agovernmententitythatregulatesanauthorizedmonopolywillmostlikely

baseregulatedpriceson:

A

B

C

marginalcost.

longrunaveragecost.

firstdegreepricediscrimination.

15Ananalystgathersthefollowingmarketsharedataforanindustry:

Sales

Company

(inmillionsof€)

ABC

300

250

200

150

100

50

Brown

Coral

Delta

Erie

Allothers

eindustry’sfour-companyconcentrationratioisclosestto:

A

B

C

71%.

86%.

95%.

16Ananalystgatheredthefollowingmarketsharedataforanindustrycomprised

offivecompanies:

Company

MarketShare(%)

Zeta

Yusef

Xenon

Waters

Vlastos

35

25

20

10

10

eindustry’sthree-firmHerfindahl–HirschmannIndexisclosestto:

A

B

C

0.185.

0.225.

0.235.

17OnedisadvantageoftheHerfindahl–HirschmannIndexisthattheindex:

A

B

C

isdifficulttocompute.

failstoreflectlowbarrierstoentry.

failstoreflecttheeffectofmergersintheindustry.

18Inanindustrycomprisedofthreecompanies,whicharesmall-scalemanu-

facturersofaneasilyreplicableproductunprotectedbybrandrecognitionor

patents,themostrepresentativemodelofcompanybehavioris:

A

oligopoly.

PracticeProblems

111

B

C

perfectcompetition.

monopolisticcompetition.

19DeepRiverManufacturingisoneofmanycompaniesinanindustrythatmake

afoodproduct.DeepRiverunitsareidenticaluptothepointtheyarelabeled.

DeepRiverproducesitslabeledbrand,whichsellsfor$2.20perunit,and

“housebrands”forsevendifferentgrocerychainswhichsellfor$2.00perunit.

EachgrocerychainsellsboththeDeepRiverbrandanditshousebrand.e

bestcharacterizationofDeepRiver’smarketis:

A

B

C

oligopoly.

perfectcompetition.

monopolisticcompetition.

112

Reading13■TheFirmandMarketStructures

SOLUTIONS

1

2

3

4

Ciscorrect.Monopolisticcompetitionischaracterizedbymanysellers,differ-

entiatedproducts,andsomepricingpower.

Aiscorrect.Fewsellersofahomogeneousorstandardizedproductcharacter-

izesanoligopoly.

Biscorrect.eproductproducedinaperfectlycompetitivemarketcannotbe

differentiatedbyadvertisingoranyothermeans.

Ciscorrect.ProfitsaremaximizedwhenMR=MC.Foramonopoly,MR=P[1

–1/E].SettingthisequaltoMCandsolvingforP:

p

$40=P[1–(1/1.5)]=P×0.333

P=$120

5

Biscorrect.elong-runcompetitiveequilibriumoccurswhereMC=AC=P

foreachcompany.EquatingMCandACimplies2+8Q=256/Q+2+4Q.

SolvingforQgivesQ=8.EquatingMCwithpricegivesP=2+8Q=66.Any

priceabove66yieldsaneconomicprofitbecauseP=MC>AC,sonewcompa-

nieswillenterthemarket.

6

7

8

Biscorrect.Acompanyinaperfectlycompetitivemarketmustacceptwhatever

pricethemarketdictates.emarginalcostscheduleofacompanyinaper-

fectlycompetitivemarketdeterminesitssupplyfunction.

Aiscorrect.Aspricesdecrease,smallercompanieswillleavethemarket

ratherthansellbelowcost.emarketshareofAquarius,thepriceleader,will

increase.

Ciscorrect.IntheNashmodel,eachcompanyconsiderstheother’sreaction

inselectingitsstrategy.Inequilibrium,neithercompanyhasanincentiveto

changeitsstrategy.etaTechisbetteroffwithopenarchitectureregardlessof

whatSigmaSoftdecides.Giventhischoice,SigmaSoftisbetteroffwithapro-

prietaryplatform.Neithercompanywillchangeitsdecisionunilaterally.

9

Ciscorrect.eprofitmaximizingchoiceisthelevelofoutputwheremarginal

revenueequalsmarginalcost.

10Aiscorrect.eoligopolistfacestwodifferentdemandstructures,onefor

priceincreasesandanotherforpricedecreases.Competitorswilllowerprices

tomatchapricereduction,butwillnotmatchapriceincrease.eresultisa

kinkeddemandcurve.

11Biscorrect.Whencompanieshavesimilarmarketshares,competitiveforces

tendtooutweighthebenefitsofcollusion.

12Biscorrect.eeconomicprofitwillattractnewentrantstothemarketand

encourageexistingcompaniestoexpandcapacity.

13Biscorrect.edominantcompany’smarketsharetendstodecreaseasprofits

attractentrybyothercompanies.

14Biscorrect.isallowstheinvestorstoreceiveanormalreturnfortherisk

theyaretakinginthemarket.

15Biscorrect.etopfourcompaniesintheindustrycomprise86percentof

industrysales:(300+250+200+150)/(300+250+200+150+100+50)=

900/1050=86%.

16Biscorrect.ethree-firmHerfindahl–HirschmannIndexis0.352+0.252+

0.202=0.225.

Solutions

113

17Biscorrect.eHerfindahl–HirschmannIndexdoesnotreflectlowbarriersto

entrythatmayrestrictthemarketpowerofcompaniescurrentlyinthemarket.

18Biscorrect.ecr