Econ 3310 Microeconomics Spring 2021 David Quigley Group Rep
Econ 3310 Microeconomics Spring 2021 David Quigleygroup Report 4
Suppose you’re writing a report for the CEO of a theme park entertainment company. The CEO has the following questions she would like analyzed and answered as well as possible.
1. Suppose the market for kids’ rides is Perfectly Competitive. What characterizes the long- run equilibrium under Perfect Competition? What is the relationship between Long-Run Average Total Cost and the profit maximizing quantity in the long-run? a. Suppose there’s a decrease in demand for kids’ rides. What are the short-run and long-run impacts of the decrease in demand on the market, specifically, the market quantity, market price, and the number of businesses producing kids’ rides?
2. Suppose the market for roller coasters is a Monopoly. What are the differences in the assumptions behind Monopoly and Perfect Competition? What is the impact of Monopoly power on the firm’s Marginal Revenue? What is the profit maximizing quantity for a firm under Monopoly? How is the market price determined in a Monopoly market? a. How does a Monopoly compare to Perfect Competition in terms of economic efficiency, consumer surplus, and producer surplus?
3. What are the similarities and differences between Monopolistic Competition and Perfect Competition? What assumptions are the same and what assumptions are different? How is Monopolistic Competition similar to and different from Perfect Competition in the short-run and the long-run? a. What aspects of Monopolistic Competition are similar to Monopoly? What are the key differences between Monopolistic Competition and Monopoly?
4. Suppose the CEO is considering trying to implement Perfect Price Discrimination (First- Degree Price Discrimination). What might be some obstacles to engaging in Perfect or First-Degree Price Discrimination? What is the impact of Perfect or First-Degree Price Discrimination on the firm’s Marginal Revenue? What is the impact of Perfect or First-Degree Price Discrimination on economic efficiency, consumer surplus, and producer surplus? a. How can Block Pricing (Second-Degree Price Discrimination) approximate Perfect Price Discrimination (First-Degree Price Discrimination), and what are the implications in terms of economic efficiency, consumer surplus, and producer surplus? b. What is Segmenting or Third-Degree Price Discrimination? What are some consequences of engaging in Segmenting or Third-Degree Price Discrimination?
5. What does Game Theory suggest is required for cooperation between two players in a game, and how might this apply to other circumstances?
Paper For Above instruction
This report provides a comprehensive analysis of various market structures and pricing strategies relevant to a theme park entertainment company, focusing on the markets for kids’ rides and roller coasters. It discusses perfect competition, monopoly, monopolistic competition, price discrimination, and the application of game theory to strategic interactions in markets. By exploring these concepts, the report aims to equip the CEO with an understanding of market dynamics and strategic decision-making to optimize profitability and efficiency.
Perfect Competition in the Market for Kids’ Rides
In a perfectly competitive market for kids’ rides, numerous small firms produce identical products, and there are no barriers to entry or exit. The characteristic features include price-taking behavior, where firms accept the market price determined by supply and demand. In the long run, economic profits tend to zero as new firms enter the market when profits are positive, driving the price down to the level of the Long-Run Average Total Cost (LRATC). At this equilibrium, firms produce at the minimum point of their LRATC curve, maximizing efficiency.
The relationship between LRATC and the profit-maximizing output is such that, in the long run, firms produce where Price (P) equals LRATC and marginal cost (MC). When demand decreases, the immediate effect in the short run is a decrease in market price and quantity, with existing firms potentially experiencing losses. Firms may reduce output or exit the market if losses persist. In the long run, the supply contracts, reducing the number of firms until the market reaches a new equilibrium where the remaining firms produce at the minimum LRATC at a lower price and quantity.
Market for Roller Coasters: Monopoly vs. Perfect Competition
A monopoly is characterized by a single firm that dominates the market with significant barriers to entry, such as high startup costs or exclusive licenses. Contrarily, perfect competition assumes many small firms with no market power. The monopolist faces the downward-sloping demand curve, resulting in marginal revenue (MR) being less than price (P). This is because to sell additional units, the monopolist must lower the price not only for the extra units but for all previous units sold, thus MR declines faster than P.
The profit-maximizing quantity is found where MR equals marginal cost (MC). The market price is then set by the demand curve at this quantity. Compared to perfect competition, a monopoly produces less, charges higher prices, and results in allocative inefficiency, leading to a reduction in consumer surplus and an increase in producer surplus, but overall a deadweight loss. This inefficiency arises because monopolies do not produce at the socially optimal level where P equals marginal cost.
Comparison between Monopolistic and Perfect Competition
Monopolistic competition shares features of both monopoly and perfect competition. It involves many firms selling differentiated products, with free entry and exit. Like perfect competition, firms in monopolistic competition can earn normal profits in the long run, but in the short run, they may earn economic profits or losses due to product differentiation.
Unlike perfect competition, where products are homogeneous, monopolistic competitors face downward-sloping demand curves. Similarities with monopoly include product differentiation and brand competition, but unlike monopoly, entry barriers are low, preventing sustained abnormal profits. Over time, this leads to a situation similar to perfect competition, with firms earning normal profits.
Price Discrimination and Strategic Pricing
Price discrimination involves charging different prices to different consumers based on their willingness to pay. Perfect or first-degree price discrimination occurs when the firm captures all consumer surplus, with prices tailored exactly to individual consumers. Obstacles include identifying consumers' willingness to pay, preventing resale, and legal or ethical concerns. Under perfect price discrimination, the firm’s marginal revenue equals the demand at each consumer, maximizing revenue but eliminating consumer surplus.
Impacts include increased producer surplus and improved economic efficiency, as all mutually beneficial transactions are realized. Consumer surplus decreases to zero. Block pricing (second-degree price discrimination) segments consumers based on quantities purchased. It approximates perfect discrimination by offering different packages or price levels, thus increasing efficiency compared to uniform pricing.
Segmenting or third-degree price discrimination involves different pricing for distinct groups based on observable characteristics, such as age or location. Its consequences include higher profits for the firm but potential concerns related to equity and fairness. It can also lead to market segmentation, with some consumers paying higher prices while others benefit from lower prices based on their elasticities of demand.
Game Theory and Cooperation Strategies
Game theory suggests that for cooperation to occur between rational players, there must be an expectation of mutual benefit, credible commitment, and possibly enforceable agreements. Repeated interactions can foster cooperation through strategies like tit-for-tat, where players reciprocate others’ actions. In other contexts, such as cartels or collusion among firms, reputation and the potential for punishment can sustain cooperation even in non-cooperative environments.
Conclusion
Understanding the nuances of market structures and strategic pricing methods enables a theme park company to optimize its operations and achieve competitive advantages. Recognizing how demand shifts affect supply and profitability, leveraging price discrimination techniques, and applying game theory principles can help the company improve revenue and consumer relationships while maintaining market efficiency.
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