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hapter 3. An indifference curve represents all market baskets that give the consumer the same level of utility. If U* is a fixed utility level, the indifference curve that corresponds to that utility level is given by In §3.5, we show that the marginal rate of substitution is equal to the ratio of the marginal utilitie... |
the second term is the income effect (because income increases). From the consumer’s budget constraint, I = PXX + PYY, we know by differen- tiation that 0I/0PX = X (A4.18) Suppose for the moment that the consumer owned goods X and Y. In that case, equation (A4.18) would tell us that when the price of good X increases ... |
occur. Suppose we know that of the last 100 offshore oil explorations, 25 have succeeded and 75 failed. In that case, the probability of success of 1/4 is objective because it is based directly on the frequency of similar experiences. But what if there are no similar past experiences to help measure probability? In su... |
ho doesn’t mind taking risks might choose Job 1, with the higher expected income and higher standard deviation, a more conservative person might choose the second job. People’s attitudes toward risk affect many of the decisions they make. In Example 5.1 we will see how attitudes toward risk affect people’s willingness ... |
nservative with respect to their choice of jobs, but still enjoy gambling. Some criminologists might describe criminals as risk lovers, especially if they commit crimes despite a high prospect of apprehension and punishment. Except for such special cases, however, few people are risk loving, at least with respect to ma... |
Ignoring this advice is unnecessarily risky: If your basket turns out to be a bad bet, all will be lost. Instead, you can reduce risk through diversification: allocating your resources to a variety of activities whose outcomes are not closely related. Suppose, for example, that you plan to take a part-time job selling ... |
ve borrowed heavily, using the house as “collateral” for a loan. Or the property might carry with it a legal requirement that limits the use to which it may be put. Suppose you are willing to pay $300,000 for the house, but you believe there is a one-in-twenty chance that careful research will reveal that the seller do... |
ehavior in undesirable ways. We will discuss this issue further in Chapter 17. • asset Something that provides a flow of money or services to its owner. *5.4 The Demand for Risky Assets Most people are risk averse. Given a choice, they prefer fixed monthly incomes to those which, though equally large on average, fluctu... |
. CHAPTER 5 • Uncertainty and Consumer Behavior 179 TABLE 5.8 INVESTMENTS—RISK AND RETURN (1926–2010) AVERAGE RATE OF RETURN (%) AVERAGE REAL RATE OF RETURN (%) RISK (STANDARD DEVIATION) Common stocks (S&P 500) Long-term corporate bonds U.S. Treasury bills 11.9 6.2 3.7 8.7 3.3 0.7 20.4 8.3 3.1 Source: Ibbotson® SBBI® 2... |
e spirit, we have simplified the investor ’s choice by limiting it to Treasury bills and stocks. The basic principles, however, would be the same if we had more assets (e.g., corporate bonds, land, and different types of stocks). Every investor faces a trade-off between risk and return.16 The degree of extra risk that ... |
me people buying four or five houses under the assumption that they could “flip” them in a year and make a quick profit. This speculative demand served to push prices up further. However, in 2006 something funny happened. Prices stopped going up. In fact, during 2006, prices 190 170 150 130 110 90 70 50 Housing Price I... |
on), see S. Bikhchandani, D. Hirschleifer, and I. Welch, “Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades,” 12 Journal of Economic Perspectives, (Summer 1998): 151–170. 23For more detailed discussion of the material presented in this section, see Stefano DellaVigna, “Psychology and Ec... |
t longer during economic downturns than in upturns. Fairness People sometimes do things because they think it is appropriate or fair to do so, even though there is no financial or other material benefit. Examples include charitable giving, volunteering time, or tipping in a restaurant. Fairness likewise affected consum... |
aws of probability. Research has shown that investors in the stock market are often subject to a small-numbers bias, believing that high returns over the past few years are likely to be followed by more high returns over the next few years—thereby contributing to the kind of “herd behavior” that we discussed in the pre... |
rk City Cab Drivers’ Labor Supply Revisited: Reference-Dependent Preferences with Rational-Expectations Targets for Hours and Income,” American Economic Review, 101 (August 2011): 1912–1934. 198 PART 2 • Producers, Consumers, and Competitive Markets 7. When is it worth paying to obtain more information to 10. What is a... |
agencies. The Production Decisions of a Firm In Chapters 3 and 4, we studied consumer behavior by breaking it down into three steps. First, we explained how to describe consumer preferences. Second, we accounted for the fact that consumers face budget constraints. Third, we saw how, given their preferences and budget ... |
astries. As you can see, we can divide inputs into the broad categories of labor, materials, and capital, each of which might include more narrow subdivisions. Labor inputs include skilled workers (carpenters, engineers) and unskilled workers (agricultural workers), as well as the entrepreneurial efforts of the firm’s ... |
= Change in output/change in labor input = q/L The Slopes of the Product Curve Figure 6.1 plots the information contained in Table 6.1. (We have connected all the points in the figure with solid lines.) Figure 6.1 (a) shows that as labor is increased, output increases until it reaches the maximum output of 112; thereaf... |
logical improvements are being made. These improvements might include genetically engineered pest-resistant seeds, more powerful and effective fertilizers, and better farm equipment. As a result, output changes from A (with an input of 6 on curve O1) to B (with an input of 7 on curve O2) to C (with an input of 8 on cur... |
for macroeconomic analysis. Macroeconomists are particularly concerned with labor productivity—the average product of labor for an entire industry or for the economy as a whole. In this subsection we discuss labor productivity in the United States and a number of foreign countries. This topic is interesting in its own... |
ecruited older people to fill positions. As we will see in Chapters 7 and 8, by taking into account this flexibility in the production process, managers can choose input combinations that minimize cost and maximize profit. Diminishing Marginal Returns Even though both labor and capital are variable in the long run, it ... |
.) and labor (producer, director, actors, etc.). To make more television shows, all inputs to production must be increased proportionally. In particular, it would be difficult to increase capital inputs at the expense of labor, because actors are necessary inputs to production (except perhaps for animated films). Likew... |
as we move away from the origin along 0A. As a result, less than twice the amount of both inputs is needed to increase production from 10 units to 20; substantially less than three times the inputs are needed to produce 30 units. The reverse would be true if the production function exhibited decreasing returns to scale... |
e of the isoquants) help the campaign manager to plan strategy? 5. For each of the following examples, draw a representative isoquant. What can you say about the marginal rate of technical substitution in each case? a. A firm can hire only full-time employees to produce its output, or it can hire some combination of fu... |
e see that economic cost and opportunity cost actually boil down to the same thing. As long as we account for and measure all of the firm’s resources properly, we will find that: Economic cost Opportunity cost CHAPTER 7 • The Cost of Production 231 While economic cost and opportunity cost both describe the same thing, ... |
he electricity, and perhaps even sell off or scrap the machinery. The company would still remain in business and could operate its remaining factories. It might even be able to re-open the factory it had closed, although doing so could be costly if it involved buying new machinery or refurbishing the old machinery. FIX... |
ing about $3 in variable cost to produce) don’t make very high profits. Marginal and Average Cost To complete our discussion of costs, we now turn to the distinction between marginal and average cost. In explaining this distinction, we use a specific numerical example of a cost function (the relationship between cost a... |
, the average cost curve rises. When average cost is at a minimum, marginal cost equals average cost. THE AVERAGE-MARGINAL RELATIONSHIP Marginal and average costs are another example of the average-marginal relationship described in Chapter 6 4The curves do not exactly match the numbers in Table 7.1. Because marginal c... |
revenues and costs on an annual flow basis. We will assume that the life of the airplane is 30 years; the amortized cost is therefore $5 million per year. The $5 million can be viewed as the annual economic depreciation for the airplane. So far, we have ignored the fact that had the firm not purchased the airplane, it... |
d the same output but at higher cost. Capital per year K2 K1 K3 A q1 C0 C1 C2 L 2 L 1 L 3 Labor per year magnitude and the isocost line would become steeper. Figure 7.4 shows this. Initially, the isocost line is C1, and the firm minimizes its costs of producing output q1 at A by using L1 units of labor and K1 units of ... |
ase we can easily calculate the slope of the line. As output increases from 100 to 200 units, capital increases from 25 to 50 units, while labor increases from 50 to 100 units. For each level of output, the firm uses half as much capital as labor. Therefore, the expansion path is a straight line with a slope equal to K... |
d then becomes a horizontal line when the capital input reaches K1. Long-Run Average Cost In the long run, the ability to change the amount of capital allows the firm to reduce costs. To see how costs vary as the firm moves along its expansion path in the long run, we can look at the long-run average and marginal cost ... |
is best. Similarly, with an output of q3, the largest of the three plants would be the most efficient choice. What is the firm’s long-run average cost curve? In the long run, the firm can change the size of its plant. In doing so, it will always choose the plant that minimizes the average cost of production. The long-... |
cking business, several related but distinct products can be offered, depending on the size of the load and the length of the haul. First, any load, small or large, can be taken directly from one location to another without intermediate stops. Second, a load can be combined with other loads (which may go between differ... |
ss for a long time, producing 10 units per year. Suppose the total labor requirement for the first year’s production is 10. In the first year of production, the firm’s cost will be high as it learns the business. But once the learning effect has taken place, production costs will fall. After 8 years, the labor required... |
conglomerate that produces more than one product line. Cost Functions and the Measurement of Scale Economies Recall that the cost-output elasticity EC is less than one when there are economies of scale and greater than one when there are diseconomies of scale. The scale economies index (SCI) provides an index of whethe... |
he marginal rate of technical substitution of capital for labor in her production process is substantially greater than the ratio of the rental rate on machinery to the wage rate for assembly-line labor. How should she alter her use of capital and labor to minimize the cost of production? 6. Why are isocost lines strai... |
of output q0. To determine the firm’s demand for capital and labor inputs, we choose the values of K and L that minimize (A7.1) subject to (A7.2). We can solve this constrained optimization problem in three steps using the method discussed in the appendix to Chapter 4: • Step 1: Set up the Lagrangian, which is the sum ... |
herefore, C1 than doubled. This is the expected result. If a firm suddenly had to pay more for labor, it would substitute away from labor and employ more of the relatively cheaper capital, thereby keeping the increase in total cost in check. Now consider the dual problem of maximizing the output that can be produced wi... |
ghts to produce drugs. Any new entrant would either have to invest in research and development to obtain its own competing drugs or pay substantial license fees to one or more firms already in the market. R&D expenditures or license fees could limit a firm’s ability to enter the market. Likewise, the aircraft industry ... |
RATIVES IN NEW YORK CITY While owners of condominiums must join with fellow condo owners to manage common spaces (e.g., entry areas), they can make their own decisions as to how to manage their individual units so as to achieve the greatest value possible. In contrast, co-ops share joint liability on any outstanding mo... |
of the profit-maximizing output by a competitive firm is so important that we will devote most of the rest of this chapter to analyzing it. We begin with the short-run output decision and then move to the long run. 8.4 Choosing Output in the Short Run How much output should a firm produce over the short run, when its p... |
wing cost information: Current output 100 units per day, 80 of which are produced during the regular shift and 20 of which are produced during overtime Materials cost $8 per unit for all output Labor cost $30 per unit for the regular shift; $50 per unit for the overtime shift 3This example draws on the discussion of co... |
e Short-Run Market Supply Curve The short-run market supply curve shows the amount of output that the industry will produce in the short run for every possible price. The industry’s output is the sum of the quantities supplied by all of its individual firms. Therefore, the market supply curve can be obtained by adding ... |
he yellow area under the firm’s horizontal demand curve and above its marginal cost curve, from zero output to the profit-maximizing output q*. When we add the marginal cost of producing each level of output from 0 to q*, we find that the sum is the total variable cost of producing q*. Marginal cost reflects increments... |
ositive longrun profit and exits when it faces the prospect of a long-run loss. 7We discuss why the long-run supply curve might be upward sloping in the next section. CHAPTER 8 • Profit Maximization and Competitive Supply 303 Industry S1 Dollars per unit of output $40 $30 Firm LMC Dollars per unit of output LAC P1 P2 P... |
Part (a) shows the economic profit of a baseball team located in a moderate-sized city. The average price of a ticket is $7, and costs are such that the team earns zero economic profit. Part (b) shows the profit of a team that has the same cost curves even though it is located in a larger city. 8In a noncompetitive ma... |
ly curve for the industry. In an increasing-cost industry, the long-run industry supply curve is upward sloping. The industry produces more output, but only at the higher price needed to compensate for the increase in input costs. The term “increasing cost” refers to the upward shift in the firms’ long-run average cost... |
,000, and his net income after expenses would be $53,000. That’s not bad for a job that requires little education and no special skills, so many more people will want to drive cabs. Thus we would expect the supply curve for taxis to be very elastic—small reductions in the price (the fare earned on an average five-mile ... |
fit if the price of the product falls from $60 to $50. R P MC MR R MR P q P P 60 C P 60 P 60 P 60 P 50 P 50 P 50 0 60 1 60 2 60 3 60 4 60 5 60 6 60 7 60 8 60 9 60 10 60 11 60 100 150 178 198 212 230 250 272 310 355 410 475 2. Using the data in the table, show what happens to the firm’s output choice and profit if the f... |
it. is a shortage—i.e., excess demand. Of course, those consumers who can still buy the good will be better off because they will now pay less. (Presumably, this was the objective of the policy in the first place.) But if we also take into account those who cannot obtain the good, how much better off are consumers as ... |
ery inelastic, price controls can result in a net loss of consumer surplus, as Figure 9.3 shows. In that figure, triangle B, which measures the loss to consumers who have been rationed out of the market, is larger than rectangle A, which measures the gain to consumers able to buy the good. Here, because consumers value... |
ts the sale of organs for transplantation. Organs may only be donated. Although the law prohibits their sale, it does not make organs valueless. Instead, it prevents those who supply organs (living persons or the families of the deceased) from reaping their economic value. It also creates a shortage of organs. Each yea... |
r price, with a corresponding loss of surplus given by triangle B. The total change in consumer surplus is therefore CS = -A - B Consumers clearly are worse off as a result of this policy. What about producers? They receive a higher price for the units they sell, which results in an increase of surplus, given by rectan... |
r surplus given by rectangle A. Because of the higher price, other consumers no longer buy the good or buy less of it, and their loss of surplus is given by triangle B. So, as with the minimum price that we examined above, consumers lose, in this case by an amount CS = -A - B PRODUCERS On the other hand, producers gain... |
ion bushels) and the quantity of private demand (2566 million bushels). The figure also shows the gains and losses to consumers and producers. Recall that consumers lose rectangle A and triangle B. You can verify that rectangle A is (3.70 − 3.46) (2566) $616 million, and triangle B is (1/2)(3.70 − 3.46)(2630 − 2566) $8... |
fore CS = -A - B - C Price P0 Pw FIGURE 9.14 IMPORT TARIFF OR QUOTA THAT ELIMINATES IMPORTS In a free market, the domestic price equals the world price Pw. A total Qd is consumed, of which Qs is supplied domestically and the rest imported. When imports are eliminated, the price is increased to P0. The gain to producers... |
addition, many countries, like Brazil, also use sugar to make ethanol, further decreasing the amount available for food. CHAPTER 9 • The Analysis of Competitive Markets 345 9.6 The Impact of a Tax or Subsidy What would happen to the price of widgets if the government imposed a $1 tax on every widget sold? Many people ... |
nalyze the impact of a tax or subsidy, you might find it helpful to work through one or two examples, such as Exercises 2 and 14 at the end of this chapter. In §2.5, we explain that demand is often more price elastic in the long run than in the short run because it takes time for people to change their consumption habi... |
the new equilibrium quantity be? What price will the buyer pay? What amount per unit will the seller receive? c. Suppose the government has a change of heart about the importance of widgets to the happiness of the American public. The tax is removed and a subsidy of $1 per unit granted to widget producers. What will th... |
art 3 examines a broad range of markets and explains how the pricing, investment, and output decisions of firms depend on market structure and the behavior of competitors. Chapters 10 and 11 examine market power: the ability to affect price, either by a seller or a buyer. We will see how market power arises, how it dif... |
ots average and marginal revenue for the data in Table 10.1. Our demand curve is a straight line and, in this case, the marginal revenue curve has twice the slope of the demand curve (and the same intercept).2 The Monopolist’s Output Decision What quantity should the monopolist produce? In Chapter 8, we saw that to max... |
is very elastic, there is little benefit to being a monopolist. Also note that a monopolist will never produce a quantity of output that is on the inelastic portion of the demand curve—i.e., where the elasticity of demand is less than 1 in absolute value. To see why, suppose that the monopolist is producing at a point ... |
inal cost is the same in each plant. Otherwise, the firm could reduce its costs and increase its profit by reallocating production. For example, if marginal cost at Plant 1 were higher than at Plant 2, the firm could produce the same output at a lower total cost by producing less at Plant 1 and more at Plant 2. • Step ... |
or the firm with monopoly power, price exceeds marginal cost. Therefore, a natural way to measure monopoly power is to examine the extent to which the profitmaximizing price exceeds marginal cost. In particular, we can use the markup ratio of price minus marginal cost to price that we introduced earlier as part of a ru... |
o State University, 1992). CHAPTER 10 • Market Power: Monopoly and Monopsony 375 18 16 14 12 10 8 6 4 2 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 VHS DVD HD-DVD FIGURE 10.9 VIDEO SALES Between 1990 and 1998, lower prices induced consumers to buy many more videos. By 2001, sales of DVDs overtook sales of ... |
y, the price is higher and consumers buy less. Because of the higher price, those consumers who buy the good lose surplus of an amount given by rectangle A. Those consumers who do not buy the good at price Pm but who would buy at price Pc also lose surplus—namely, an amount given by triangle B. The total loss of consum... |
ement in determining the firm’s rate of return, a firm’s capital stock is difficult to value. Second, while a “fair” rate of 13Regulatory agencies often use a formula like the following to determine price: P = AVC + (D + T + sK)/Q where AVC is average variable cost, Q is output, s is the allowed “fair” rate of return, ... |
ogous. As Figure 10.15(b) illustrates, the monopsonist can purchase a good at a price below its marginal value because it faces an upward-sloping supply, or average expenditure, curve. Thus for a monopsonist, marginal expenditure is greater than average expenditure. Equating marginal value with marginal expenditure lea... |
power could not be measured directly, data were available for variables that help determine monopsony power, such as buyer concentration (the fraction of total sales going to the three or four largest firms) and the average annual size of buyers’ orders. The study found that buyers’ monopsony power had an important ef... |
common law (i.e., the practice whereby courts interpret statutes) and supplemental provisions and rulings (e.g., by the FTC or the Justice Department). Enforcement of the Antitrust Laws The antitrust laws are enforced in three ways: 1. Through the Antitrust Division of the Department of Justice. As an arm of the execu... |
ent said yes; Microsoft disagreed. The Antitrust Division of the U.S. DOJ filed suit, claiming that Microsoft had illegally bundled its Internet browser, Internet Explorer, with its operating system for the purpose of maintaining its dominant operating system monopoly. The DOJ claimed that Microsoft viewed Netscape’s I... |
ow should the firm adjust (i.e., raise, lower, or leave unchanged) the following: Output in Factory 1? Output in Factory 2? Total output? Price? CHAPTER 10 • Market Power: Monopoly and Monopsony 397 9. A drug company has a monopoly on a new patented medicine. The product can be made in either of two plants. The costs o... |
ce 417 11.5 The Complete Dinner versus à la Carte: A Restaurant’s Pricing Problem 427 11.6 Advertising in Practice 432 399 400 PART 3 • Market Structure and Competitive Strategy cost of long-distance telephone service, which gives users the opportunity to make long-distance calls, paying by the minute as they do so. We... |
d by professionals, such as doctors, lawyers, accountants, or architects, who know their clients reasonably well. In such cases, the client’s willingness to pay can be assessed and fees set accordingly. For example, a doctor may offer a reduced fee to a low-income patient whose willingness to pay or insurance coverage ... |
First, we set incremental profit for sales to the first group of consumers equal to zero: p Q1 = (P1Q1) Q1 - C Q1 = 0 Here, (P1Q1)/Q1 is the incremental revenue from an extra unit of sales to the first group of consumers (i.e., MR1). The next term, C/Q1, is the incremental cost of producing this extra unit—i.e., margi... |
airlines competing for customers, the elasticities of demand for each airline will be larger. But the relative sizes of elasticities across the three categories of service should be about the same. When elasticities of demand differ so widely, it should not be surprising that airlines set such different fares for diffe... |
rs whose books always seem to sell, publishers have little data with which to estimate demand for a book that is about to be published. Often, they can judge only from the past sales of similar books. But usually only aggregate data are available for each category of book. Most new novels, therefore, are released at si... |
ome free usage before usage is charged. This twist lets the firm set a higher entry fee T without losing as many small customers. Because these small customers might pay little or nothing for usage under this scheme, the higher entry fee will capture their surplus without driving them out of the market, while also capt... |
tal revenue of $26,000, the same as by renting the films separately. Now, suppose a firm is selling two different goods to many consumers. To analyze the possible advantages of bundling, we will use a simple diagram to describe the preferences of the consumers in terms of their reservation prices and their consumption ... |
onsumers A and D. With pure bundling, the price of the bundle is $100. With mixed bundling, the price of the bundle can be increased to $120 and consumers A and D can still be charged $90 for a single good. $10 20 40 60 80 90 100 120 r1 consumer A from buying good 1 and consumer D from buying good 2. We leave it to you... |
ets $10.07 $8.97 $9.27 $9.27 $10.67 $9.77 $7.89 $6.79 $6.99 $7.19 $8.39 $7.59 $2.18 $2.18 $2.28 $2.08 $2.28 $2.18 • tying Practice of requiring a customer to purchase one good in order to purchase another. Tying Tying is a general term that refers to any requirement that products be bought or sold in some combination. ... |
h a price elasticity of demand of −4, its markup of price over marginal cost is substantial? The answer is yes; equation (11.4) tells us that the firm’s advertising-to-sales ratio should be −(.2/−4) = 5 percent, so the firm should increase its advertising budget from $10,000 to $50,000. This rule makes intuitive sense.... |
d the ability to prevent arbitrage. Explain how the following can function as price discrimination schemes and discuss both sorting and arbitrage: a. Requiring airline travelers to spend at least one Saturday night away from home to qualify for a low fare. b. Insisting on delivering cement to buyers and basing prices o... |
nsisting of three consumers with reservation prices as follows: RESERVATION PRICE ($) CONSUMER FOR 1 FOR 2 A B C 20 60 100 100 60 20 The unit cost of each product is $30. a. Compute the optimal prices and profits for (i) selling the goods separately, (ii) pure bundling, and (iii) mixed bundling. b. Which strategy would... |
e management of this firm would choose a price of automobiles to maximize the firm’s profit: p = (P - cE)(A - P) (A11.12) The profit-maximizing price of cars is now: P* = (A + cE)/2 (A11.13) which yields a profit of: p* = 1 4 (A - cE)2 (A11.14) 3Now take the derivative of p E with respect to PE and set it equal to zero... |
R 11 • Pricing with Market Power 445 Now, what transfer prices P1 and P2 should be “charged” to the downstream division for its use of the intermediate inputs? Remember that if each of the three divisions uses these transfer prices to maximize its own divisional profit, the profit of the overall firm should be maximize... |
an Asian country with a low corporate profits tax rate, while the downstream Assembly Division is located in the United States, with a higher tax rate. Suppose that in the absence of taxes, the marginal cost and thus the optimal transfer price for an engine is $5000. How would this transfer price be affected by taxes? ... |
rocter & Gamble in a Prisoners’ Dilemma 471 12.4 Price Leadership and Price Rigidity in Commercial Banking 475 12.5 The Prices of College Textbooks 476 12.6 The Cartelization of Intercollegiate Athletics 480 12.7 The Milk Cartel 481 451 452 PART 3 • Market Structure and Competitive Strategy • monopolistic competition M... |
ost. Excess capacity is inefficient because average cost would be lower with fewer firms. These inefficiencies make consumers worse off. Is monopolistic competition then a socially undesirable market structure that should be regulated? The answer—for two reasons—is probably no: 1. In most monopolistically competitive m... |
demanded is equal to the quantity supplied. • Nash equilibrium Set of strategies or actions in which each firm does the best it can given its competitors’ actions. • duopoly Market in which two firms compete with each other. Recall from §8.8 that when firms produce homogeneous or identical goods, consumers consider on... |
fine ourselves to the behavior of firms in equilibrium. The Linear Demand Curve—An Example Let’s work through an example—two identical firms facing a linear market demand curve. This will help clarify the meaning of a Cournot equilibrium and let us compare it with the competitive equilibrium and the equilibrium that re... |
em a little, you will see that because of the incentive to cut prices, the Nash equilibrium is the competitive outcome—i.e., both firms set price equal to marginal cost: P1 = P2 = $3. Then industry output is 27 units, of which each firm produces 13.5 units. And because price equals marginal cost, both firms earn zero p... |
charging $1.30.) Consequently, you would not want to charge $1.50 (or more). Assuming that your competitors have followed the same reasoning, you should not expect them to charge $1.50 (or more) either. What if your competitors charge $1.30? In that case, you will lose money, but you will lose the least amount of mone... |
the payoffs to P&G’s competitors also tabulated.8 If all the firms charge $1.50, each will make a profit of $20,000 per month, 7As in Example 12.2, some of the facts about the product and the market have been altered to protect P&G’s proprietary interests. 472 PART 3 • Market Structure and Competitive Strategy TABLE 1... |
creasingly necessary to change prices that have remained rigid for some time. In that case, they might look to a price leader to signal when and by how much price should change. Sometimes a large firm will naturally act as leader; sometimes different firms will act as leader from time to time. The example that follows ... |
t costs, different assessments of market demand, and even different objectives, and they may therefore want to set price at different levels. Furthermore, each member of the cartel will be tempted to “cheat” by lowering its price slightly to capture a larger market share than it was allotted. Most often, only the threa... |
y the Metropolitan Intercollegiate Basketball Committee, challenged the NCAA’s rule that effectively forced schools invited to its tournament to boycott the NIT. The NIT claimed that this practice was anticompetitive and an illegal use of the NCAA’s powers. The parties ultimately settled the lawsuit for nearly $60 mill... |
ompetitor. b. How much will each firm produce, and what will its profit be? 5. Two firms compete in selling identical widgets. They choose their output levels Q1 and Q2 simultaneously and face the demand curve P = 30 - Q Assuming that this second firm has the same costs as the first, write the profits of each firm as f... |
n Chapter 12, we began to explore some of the strategic output and pricing decisions that firms must often make. We saw how a firm can take into account the likely responses of its competitors when it makes these decisions. However, there are many questions about market structure and firm behavior that we have not yet ... |
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