Production Economics
Midterm Examination 2

Short Answer Essay

1. Government may intervene in a market and approve an exclusive franchise for a monopoly. Please describe in at least one sentence why government approves a franchise?

(a) Natural Monopoly

(b) Source of Revenue

(c) Redistribute Rent

(d) Intellectual Property Rights

(e) Rent-Seeking Behavior

2. What are the methods a firm uses to strengthen market barriers? Please describe in at least one sentence each the following:

(a) Economies of Scale

(b) Absolute Cost Advantage

(c) Sunk Expenditures by Consumers

3. What four market barriers does Microsoft have?

4. Define each the following using at least one sentence.

(a) What is a dominant firm with a competitive fringe?

(b) What is X-Inefficiency?

(c) Why does a monopoly invest into research and development?

5. The market has the following characteristics.

• The market demand function is P(Q) = 500 – 2 Q

• Each firm has an average cost function of AC(q _i) = MC(q _i) = 100

(a) Evaluate the equilibrium market quantity and price if the market is purely competitive.

(b) Evaluate the equilibrium market quantity and price if a monopoly merges and consolidates all the firms into one. Furthermore, the monopoly reduces the AC(Q) = MC(Q) = 50.

(c) Evaluate the change in social welfare after the monopoly takes over the market. You may draw the supply and demand functions to help answer this question.

6. You have the demand function for the market, P(Q) = 100 - Q. A pure monopoly has a marginal cost function, MC = 15, while a monopoly that suffers from x-inefficiency has a marginal cost function, MC _X = 30.

(a) What is the price and quantity for both the pure monopoly and a monopoly that suffers from X-inefficiency?

(b) Which monopoly has a higher social welfare?

7. You have the demand function for the market, P(Q) = 100 - Q. A pure monopoly has a marginal cost function, MC = 15, while a monopoly that invests into research and development has a marginal cost function, MC _R = 6.

(a) What is the price and quantity for both the pure monopoly and a monopoly that invests into research and development?

(b) Which monopoly has a higher social welfare?

8. Please describe in at least one sentence each type of price discrimination.

(a) Market Segmentation

(b) Two-part Pricing

(c) Tying and Bundling

(d) Quality Discrimination

9. What are the three conditions that a firm needs to effectively use price discrimination?

10. Please describe in at least on sentence each method a company uses to prevent re-sell of their products.

(a) Warranties

(b) High Transaction Costs

(c) Contractual Remedies

(d) Vertical Integration

(e) Adulteration

(f) Legal Restrictions

11. (a) What is the first-degree price discrimination? Please show and explain with a demand and marginal cost function.

(b) What is the Pacman approach for price discrimination?

(c) Judge whether first-degree price discrimination allocative efficient.

(d) What did Coase say about this form of price discrimination?

12. (a) What is the second-degree price discrimination? Please show and explain using two demand functions and one marginal cost function.

(b) Where does the monopolist's profit come from?

(c) Judge whether the markets are allocative efficient.

13. (a) What is the third degree price discrimination? Please show and explain using two demand functions and one marginal cost function.

(b) Appraise the information costs the monopolist needs for this market as opposed to the other two types of price discrimination.

(c) Judge whether the markets are allocated efficient.

14. Please define the following terms in terms of quality.

(a) Search Goods

(b) Experience Goods

(c) Asymmetric Information

15, What are three methods firms use to prove their product has a high quality?

16. Using a demand, marginal revenue, and marginal cost functions, please explain what happens if a monopoly offers a better quality good.

(a) What is the gain in a monopolist's profits?

(b) What is the gain in consumers' surplus?

17. Why do some firms simultaneously sell a high-quality product and a low-quality product?

(a) Please use two indifference curves for customers who demand high quality and consumers who demand low quality.

(b) Does this explain why companies do not offer an average quality product?

18. A market has five firms with the market shares: 30%, 25%, 20%, 15%, and 10%.

(a) Evaluate the concentration ratio.

(b) Evaluate the Herfindahl Index.

(c) Judge whether the concentration ratio and Herfindahl Index are accurate measures of market power.

19. How do firms differentiate their products?

20. Please draw a demand, marginal revenue, average total cost, and marginal costs functions for a monopolistically competitive firm.

(a) Is this market structure allocative efficient?

(b) Is this market structure productive efficient?

21. (a) What is marginal cost pricing? Please show and explain with a demand, long-run average cost, marginal revenue, and marginal cost functions.

(b) Judge whether average cost pricing is allocative efficient.

(c) What is the problem of this price regulation?