Solution
David answered on
Dec 21 2021
Unit 3 Assignment
Unit 3 Assignment
50 Points
Short Answer Questions
(5 points each)
1. Distinguish between a horizontal merger and a vertical merger. Give one example of a recent merger.
Answer:
Horizontal merger is a merger between two firms of same industry. for example if Coca-Cola were to buy PepsiCo, then it would be known as horizontal merge
Conversely, vertical merger is a merger between two firms that have supplier-buyer relationship. For example; when a supplier buys a reseller or vice-versa.
The recent example; the merger between Chrysler and Daimler-Benz is an example of horizontal merger. In this case, Chrysler was sold to Daimler-Benz.
2.
What is the main difference between the demand curves for the perfect competitor and the monopolist? Explain the difference between the firm’s demand curve for each and then for the market for each.
Answer:
Difference between demand curves for each firm:
The demand curve of firm in case of perfect competition is horizontal i.e. it is
perfectly elastic. This is because price in perfect competition is determined by
market and each firm takes this price as given. So price is same at levels of
output for a firm and hence we have horizontal demand curve.
The demand curve of a firm under monopoly, on the other hand, is negatively
sloped. A monopolist is the only producer in the market and therefore it is price
maker in the market. So demand would be higher only if price is reduced.
Difference between market demand curves for each:
The market demand under perfect competition is negatively sloped curve,
epresenting that quantity demanded in the market is negatively related with
price. This is because price is determined in the market, so when price is low,
quantity demanded would be higher.
The market demand curve in the monopoly also would be negatively sloped. This is because in a monopoly market, there is only one supplier of goods. So there would be no difference between the firm’s demand curve and market demand curve. So market demand curve would be negatively sloped implying that more of good is purchased only when its price is reduced.
3.
In what ways is government involved with the creation of ba
iers to entry?
Answer:
Government by issuing patent, license and property rights provide an exclusive right to ca
y out production without any fear of being copied by some other entity. By this way, the government creates ba
iers of entry and thereby gives rise to monopoly. Apart from this, by undertaking the production process by itself, the government creates a kind of ba
iers to entry.
4.
Explain the difference between informational advertising and persuasive advertising. Give an example of a product that would be the subject of each type of advertising and explain why that type of advertising fits the product.
Answer:
Informational advertisement is fact based advertisement. This is meant to inform the public what quality the good possess. In other words, this type of advertisement is designed to inform the viewers, how the product works, what the product does and what its usages are.
Persuasive advertisement, on the other hand, is emotion based advertisement. This type of advertisement is meant to appeal to the consumers to buy the product. It is like emotionally convincing the consumer to buy the product by showing the good as happier, wealthier, attractive etc.
For example, advertisement of ‘ford car’ is both informational and persuasive. It is Informational because it talks about the feature of products. It is persuasive because it emotionally encourages people to buy it by showing the comfort and happiness level.
5.
Explain how a monopolist can increase profits by price discriminating. What are the conditions necessary for price discrimination?
Answer:
A monopoly by charging different price t from different consumers for the same product can increase its profit. The most commonly used price discrimination by monopolist is “third degree price discrimination”. Under third degree price discrimination, the monopolist charges different price form different groups of consumers characterized different market condition. The price is differentiated as per the willingness to pay in two sets of market and therefore the monopolist is able to earn higher profit.
There are three necessary conditions for price discrimination
a. The market should be divisible into different sub-groups of consumers.
. The elasticity of demand should be different in the different sub-groups of market
c. The resale of the product should not be possible.
Project and Analysis Questions
(Points listed by each question)
6. There are six characteristics for a competitive market that can help an economy achieve the virtues of competition. The six characteristics are:
Many firms
Identical products
MC = p
Low ba
iers to entry
Zero economic profit
Perfect information
However, these characteristics don’t always occur. Pick a market for a good or service with which you are familiar (for example, college textbooks or car insurance—but don’t use these examples). Be sure you select a good or service produced by firms operating to make a profit. Don’t pick something produced by the government or a non-profit firm.
(8 points)
Answer the following questions:
A) Explain the market you selected.
Answer:
I choose the Soap industry (especially beauty soap industry) in the United States. This industry has been in existence since before WW1 and has changed many changes since then.
B) In the market you selected, which of these six characteristics is present?
Answer:
It has following features, many firms, low ba
iers to entry, perfect information.
C) Which of the characteristics is absent?
Answer:
Absent Characteristics are; P = mc, identical product, zero economic profit
D) Pick one of the absent characteristics. Provide evidence to support your judgment that it is missing.
Answer:
I choose ‘identical product’. Products in the soap industry are similar but not identical. They are always differentiated from each-other in some form. The difference could be in the form of packaging, quality,
and name, size etc. For example; a beauty soap by P&G is likely to be different from a beauty soap by Lux.
7. Utilizing the chicken wing production function that we completed in the Unit 2 homework assignment which would have the following answers, respond to the questions given, assuming the firm is a perfectly competitive firm:
(8 points)
Input
(Hours)
Output
(Wings)
MPP
TFC
TVC
TC
AFC
AVC
ATC
MC
25
118
250
212.50
462.50
2.1
1.8
3.9
6.7
1.3
35
185
250
297.50
547.50
1.4
1.6
3.0
5.7
1.5
45
242
250
382.50
632.50
1.0
1.6
2.6
5.1
1.7
55
293
250
467.50
717.50
0.9
1.6
2.4
3.8
2.2
65
331
250
552.50
802.50
0.8
1.7
2.4
2.9
2.9
75
360
250
637.50
887.50
0.7
1.8
2.5
A) Assume that the selling price for chicken wings is $2.50. What would be the profit maximizing rate of output?
Answer:
At the profit maximizing point, price must equal marginal cost.
Here price = $2.5 [given]
We compare this price level with marginal cost given in the table above, we note that till output level of 331, price is exceeding marginal cost but after than...