Pearson eText Microeconomics -- Instant Access (Pearson+)
9th Edition
ISBN: 9780136879572
Author: Robert Pindyck, Daniel Rubinfeld
Publisher: PEARSON+
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Chapter 13, Problem 2E
To determine
The factors leading to over capacity
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Verizon can be viewed as a first mover. Now suppose both ATT and Verizon are considering whether and how to enter a potential market.
Market demand is given by the inverse demand function p= 900−q1−q2, where p is the market price margin, q1 is the quantity sold by Verizon and q2 is the quantity sold by ATT.
To enter the market, a retailer must build a store. Two types of stores can be built: Small and Large. The Small store requires an investment of $50,000, and it allows the retailer to sell as many as 100 units of the goods at zero marginal cost. Alternatively, they can pay $175,000 to construct a Large store that will allow it to sell any number of units at zero marginal cost.
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- Verizon can be viewed as a first mover. Now suppose both ATT and Verizon are considering whether and how to enter a potential market. Market demand is given by the inverse demand function p= 900−q1−q2, where p is the market price margin, q1 is the quantity sold by Verizon and q2 is the quantity sold by ATT. To enter the market, a retailer must build a store. Two types of stores can be built: Small and Large. The Small store requires an investment of $50,000, and it allows the retailer to sell as many as 100 units of the goods at zero marginal cost. Alternatively, they can pay $175,000 to construct a Large store that will allow it to sell any number of units at zero marginal cost. Assume Verizon stays out of the potential market (i.e. chooses not to enter N1 at the first stage, q1= 0). Calculate Verizon's profit for the following cases: a.) ATT chooses not to enter N at the second stage after viewing Verizon's choice. b.) ATT chooses to build a Small store S at the second stage…arrow_forwardA free market is one where decisions regarding what and how much to produce are made by the market itself. This market is made up of buyers and sellers negotiating prices for goods and services. It is generally accepted that there are four degrees of competition within a free-market system. These include perfect competition, monopolistic competition, oligopoly, and monopoly. One benefit of the free market is that it allows open competition among companies. Businesses must provide customers with high-quality products at fair prices with good service. If they don't, they lose customers to businesses that do. Select the degree of competition that best describes each listed industry or business based on the description.arrow_forwardUse the following information to answer the question. You are managing a competitive corn farm that faces random demand. You must decide how much corn to produce before observing the actual price. As the figure shows, the price will be $12 or $6 per bushel. The probability the price will be $12 is 2/3, and the probability that the price will be $6 is 1/3. Your marginal cost curve is also included in the figure. What is the quantity of corn that maximizes expected profit? $13 $12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 10K 20K 30К 40K 50K 60K MC P=MR=$12 P=MR=$6 Quantity(Q)arrow_forward
- The auto industry in the U.S. has long been dominated by the Big Three carmakers: Ford, General Motors, and Chrysler. The auto industry in China, on the other hand, has more than 170 carmakers. Automakers in the U.S. have some monopoly power while the car market in China has the characteristics of a perfectly competitive market. Based on these differences in market characteristics, explain how car makers in the U.S. will “behave” compared to carmakers in China. In particular, address the following considerations: How will the profits of carmakers in the U.S. compare to the profits of carmakers in China, everything else being equal?arrow_forwardThe auto industry in the U.S. has long been dominated by the Big Three carmakers: Ford, General Motors, and Chrysler. The auto industry in China, on the other hand, has more than 170 carmakers. Automakers in the U.S. have some monopoly power while the car market in China has the characteristics of a perfectly competitive market. Based on these differences in market characteristics, explain how car makers in the U.S. will “behave” compared to carmakers in China. In particular, address the following considerations: How will the price of cars in the U.S. compare to the price of cars in China, everything else being equal?arrow_forwardThe auto industry in the U.S. has long been dominated by the Big Three carmakers: Ford, General Motors, and Chrysler. The auto industry in China, on the other hand, has more than 170 carmakers. Automakers in the U.S. have some monopoly power while the car market in China has the characteristics of a perfectly competitive market. Based on these differences in market characteristics, explain how car makers in the U.S. will “behave” compared to carmakers in China. In particular, address the following considerations: How will carmakers in the U.S. respond to consumers’ desires compared to Chinese carmakers’ response to consumers’ desires, everything else being equal?arrow_forward
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- For each scenario in the following table, determine which market model best describes the scenario. Then identify the number of firms, the type of product, and the ease with which new firms can enter the market under this market structure. Scenario Hundreds of colleges serve millions of students each year. The colleges vary by location, size, cost, and educational quality, which allows students to match schools to their diverse preferences. Hundreds of high school students who require tutoring in algebra choose among dozens of tutoring companies offering similar services. The taxi companies on all the licences granted by the city. Consumers don't care which taxi company Only one pharmaceutical company has a government patent to sell an experimental drug Number of Firms Type of Product Entry Market Modelarrow_forwardRecently, Pfizer and Allergan—the makers of Viagra and Botox, respectively—initiated a $160 billion merger. Pharmaceutical companies tend to spend a greater percentage of sales on R&D activities than other industries. The government encourages these R&D activities by granting companies patents for drugs approved by the Food and Drug Administration. For instance, Allergan spent large sums of money developing its popular wrinkle-removing neurotoxin, Botox, which is currently protected under a patent. Botox sells for about $15 per vial. Calculate the Lerner index if the marginal cost of producing Botox is $1.50 per vial. Does the Lerner index make sense in this situation?arrow_forwardRecently, Pfizer and Allergan—the makers of Viagra and Botox, respectively—initiated a $160 billion merger. Pharmaceutical companies tend to spend a greater percentage of sales on R&D activities than other industries. The government encourages these R&D activities by granting companies patents for drugs approved by the Food and Drug Administration. For instance, Allergan spent large sums of money developing its popular wrinkle-removing neurotoxin, Botox, which is currently protected under a patent. Botox sells for about $15 per vial. Calculate the Lerner index if the marginal cost of producing Botox is $1.50 per vial. Does the Lerner index make sense in this situation? Explain.arrow_forward
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