What product price must the firm receive in order to remain in this industry in the long run?
In the long run, the firm needs to not only make a profit on each item but cover its fixed cost as well. This would be any price over and above the average total cost. So for example, at 350 workers, the firm needs to receive at least $62.14 to break even.
4) Consider a firm that has just built a plant, which cost $20,000. Each worker earns $5.00 per hour.
a)
Based on this information, fill in the table below.
Number of Worker Hours
Output
Marginal Product
Fixed
Cost
Variable
Cost
Total
Cost
Marginal
Cost
Average
Variable
Cost
Average
Total
Cost
0
0
20,000
50
8
20000
20,250
5
5
10
20000
20,500
5
5
8
20000
20,750
5
5
6
20000
21,000
5
5
4
20000
21,250
5
5
85
1900
2
20000
21,500
5
5
71.67
1950
1
20000
21,750
5
5
62.14
b)
In the example above, what price must the firm receive in order to keep producing in the short run?
The price the firm must receive in the short run is the price that covers the variable cost, so the firm must receive at least $5 per unit in the short run. In the long run, of course, the firm has to pay down the $20,000 facility.
c)
In the example above, assume that there is a maximum of 350 worker hours available (that is, there are no possibilities beyond the 350 worker hours shown in the table). What product price must the firm receive in order to remain in this industry in the long run?
In the long run, the firm needs to not only make a profit on each item but cover its fixed cost as well. This would be any price over and above the average total cost. So for example, at 350 workers, the firm needs to receive at least $62.14 to break even.
5)
A firm in an oligopolistic industry has the following demand, total cost, MR, and MC equations:
P = 600-20Q
TC = 700 + 160Q + 15Q2
MR = 600-40Q
MC = 160 + 30Q
Find:
a. quantity at which profit is maximized (Reminder: show your work).
This should be at the point where marginal revenue = marginal cost
600 -- 40Q = 160 + 30Q
440 = 70Q
Q = 6.28
b. maximum profit.
P at this level would be: 600 -- 20 (6.28) = $474.4
So profit would be Revenue -- Total cost
Revenue is 6.28(474.4) = 2979.23
Total cost at this level would be: 700 + (16)(6.28) + 15 (6.28) 2 = 1392.05
So maximum profit would e: $2,979.23 - $1,392.05 = $1,587.18
c. quantity at which revenue is maximized.
600 = 40Q
600 = 40Q
Q = 15
d. maximum revenue.
At Q = 15, P = $300
Revenue = $4,500
Note: I don't know if it's just me, but there is something wrong with this question. The equations don't make a lot of sense, such as marginal revenue declining the more you produce, so that past 15 units marginal revenue is negative. That makes no sense. You also have P, which goes below zero if you produce more than 30 units. So the answers you get don't really make a lot of sense. You can figure the math out, but I gave up trying to make sense of the actual numbers.
6)
Consider the fictitious industries depicted in the three industries shown below. For each industry, calculate the Herfindahl-Hirschman (HH) index and indicate whether or not the Department of Justice would consider it a concentrated industry.
a) Industry #1 Market Share of Each Firm:
Firm
Firm's Percent of Sales
Firm Alpha
60%
Firm Beta
10%
Firm Epsilon
10%
Firm Omega
10%
Firm Delta
10%
Herfindahl-Hirschman Index for Industry #1:
Would the Justice Department consider this a concentrated industry?
Using the Herfindahl-Hirschman Index formula:
.62 + 4 * .12 = 0.4
The U.S. threshold is 0.18, so yes this industry would be considered concentrated by the U.S. Department of Justice.
b) Industry #2 Market Share of Each Firm:
Firm
Firm's Percent of Sales
Verde Company
33%
Rouge Company
33%
Jaune Company
34%
Herfindahl-Hirschman Index for Industry #2:
Would the Justice Department consider this a concentrated industry?
.332 * 2 + .342 = .3334
Again, this industry would be considered to be concentrated.
c) Industry #3 Market Share of Each Firm:
Firm
Firm's Percent of Sales
Felucia
10%
Cato Neimoidia
10%
Mygeeto
Sellers must find ways to differentiate themselves in such a market environment. An example of perfect competition -- a row of date vendors at the Abu Dhabi Night Market. They must compete by differentiating themselves, such as with their charm or sales skills. Likewise, monopolistically competitive firms must seek creative ways to differentiate themselves from their competition.
In a monopolistically competitive industry, firms seek to use differentiation to create a monopoly for themselves. The idea is that if a firm becomes sufficiently differentiated, it can earn monopoly-like rents on its goods. Where a monopoly gains pricing power by not having competitors, monopolistic competitors gain pricing power by reducing the desire of consumers to use competitors.
8) Many markets show some characteristics of both -- competitive forces and evidence of market influence or power. In the company that you researched, did you see evidence of both? Describe the evidence of firm structure that you observed -- either evidence of competitive forces, or evidence that your firm had the ability to influence prices in the market, or evidence of both.
A good example of this can be found in Apple. Apple has a lot of market influence that derives from the company's strategy of creating differentiated products (different operating systems, for example) and engendering strong brand loyalty. This allows Apple to set its prices at a premium to the general market. Other computer-makers generally cannot do this, even ones with relatively strong brands like HP. However, Apple is still influenced by the market. The company can only charge a certain premium, after which it will begin to lose sales to cheaper substitutes. Customers may want an Apple computer but may see the price tag as being too high after a certain point. This effectively puts a ceiling on the price that Apple can charge.
9) Regarding market power
a. How can we detect market power?
Market power can be detected when firms are able to change their prices either at the supplier end or the buyer end without changing their demand. Thus, if firms can increase profit by changing prices.
b. Why should we care about detecting market power?
Detecting market power is important for investors to know which companies make the best investments. For firms, internally, it is valuable for them to understand their market power because this helps them to understand the degree to which they can influence their own profitability. Firms need to leverage their market power by changing prices, but they can only do so when they recognize that they have market power.
c. Please provide an example to support your statements. (Sources are not necessary on this test and personal observations are fine.)
A good example of this is with gas stations. Gas stations have tremendous market power. This is mitigated only somewhat by consumer knowledge and the time lag between price signals from the stations and consumer decisions (i.e. buying a car with better mileage). Gas stations know that if the price of crude is rising, they are in a better position to increase their prices. The cost of the gas they are selling may have been low -- purchased several months prior -- but this asymmetry of information provides them an opportunity to leverage their pricing power to increase their profits.
10) Describe at least two examples unique risks facing a multinational corporation that are not risks for a small local firm. For each risk, describe an action that a multinational firm might take to decrease its exposure to the risk.
A multinational faces a number of risks. Currency exchange rate risk is one -- MNCs do business in a number of currencies. When the value of those currencies changes, so too does the value of the costs and revenues of the MNC. There are a number of ways that MNCs decrease exposure. When possible, they do business in their home currency (for example an American firm insisting on selling in U.S. dollars). There are also hedging mechanisms such as forwards, futures and interest rate swaps that can lock in future prices, reducing the firm's exposure to foreign currency exchange risk.
MNCs also face challenges with respect to political risk. In other countries, adverse political actions can be less predictable than in the home country where the company knows the laws and may have good contacts in government. This risk can be minimized by taking on local partners, winning influence with the foreign government or gaining legal representation in the foreign country.
11) Supporters of globalization argue that international trade benefits a country's economy. Indicate whether trade is a benefit for each of the parties described in the situations below.
Situation #1: The average price of…
