The Presence Of Explains The Negatively Sloped Portion

The Presence Of Explains The Negatively Sloped Portio

Describe in your own words the concept of market power.

Provide an example of a firm exercising its market power.

Referring to your example above, answer the following questions: What are the sources of the firm's market power? Can they be sustained over a short run / long run?

Answer the question below in your conclusion: Why is it hard for a firm to maintain market power over a Long Run.

The firm-specific demand curve shows the relationship between the _______ charged by the firm and the _____ by the firm.

A perfectly competitive firm is a price _________ while a monopolist is a price ________.

Economic profit equals _______ minus______.

A firm produces 20 units of output at a market price of $5, a marginal cost of $5, and an average cost of $3. The firm’s economic profit is $______, and the firm (is/is not) maximizing its economic profit.

Changes in the break-even price. Consider a switchgrass farmer whose initial break-even price is $76 ($36 explicit cost + $40 opportunity cost for land). Explain the effects of the following changes on the farmer’s production cost and break-even price.

A wheat farmer: "the price of wheat is very low this year, and the most I can get for the crop is $35,000. If I paid you the same amount as last year ($30,000), I would lose money because I also have to worry about the $20,000 I paid three months ago for seed and fertilizer. I’d be crazy to pay $35,000. If you are willing to work or half as much as last year ($15,000), my total cost will be $35,000 so I’ll break even. If you don’t take a pay cut, I won’t harvest the wheat." Are the farmer bluffing, or will the farm workers really lose their jobs if they reject the proposed pay cut?

A firm making zero economic profit says in the market because total revenue is high enough to cover all the firm’s costs, including the opportunity costs of the entrepreneur’s __________and____________.

In table 6.4, suppose the relationship between industry output and the total cost for the typical firm is linear, and each firm produces six shirts. If there are 400 firms in the industry, the total cost for the typical firm is $_____, and the average cost per shirt is $______. Another point on the supply curve is prices of $_______ and quantity of _______ shirts.

The short-run supply curve is steeper than the long-run supply curve because of the principle of____________.

As the total output of a constant-cost industry increases, the_______ cost does not change, so the long-run supply curve is ________ (horizontal/positively sloped/negatively sloped).

Read the article "Trading in a Pit Market". Considering 18 participants (buyers and sellers), answer: What do you expect the average profit for a buyer to be in each round? What do you expect the average profit for a seller to be? What is the highest cumulative (total) profit a seller can make if the game is played 10 times?

Go to eBay.com and search for top 10 listings of a specific item, sorted by "Best Match." List the item numbers and summarize the price range (lowest and highest). How could the market supply curve be constructed based on this data?

For a monopolist, marginal revenue is _______, (greater/less) than the price.

A monopoly that cuts its price gains revenue from its _______ customers but loses revenue from its ________ customers.

The marginal cost of an additional baseball fan is zero, so the profit-maximizing condition simplifies to ________.

The average cost for providing off-street parking is $30 per space per day, and a monopolist charges $35 for 200 spaces. The maximum amount you are willing to pay for monopoly is $______.

A patent increases the incentive to develop new products because it ________ the price of the product and thus generates the profit to cover a firm’s costs of_________.

A price discriminating firm will charge a higher price to consumers with a relatively ______ (elastic/inelastic) demand and a lower price to consumers with a relatively ______ (elastic/inelastic) demand.

For a movie theater charging $6 with a marginal cost of $1, and given demand slopes for seniors and nonseniors, calculate the marginal revenue for each group and determine whether to raise or lower prices for profit maximization.

Considering an airline with a single price policy of $300, with 120 business travelers and 80 tourists, and demand slopes of -$2 and -$1 respectively, analyze if the policy maximizes profit and suggest how prices should change.

Sample Paper For Above instruction

The concept of market power is fundamental in understanding the behavior of firms within various market structures. Market power refers to a firm's ability to influence the price of its product in the market, typically resulting from barriers to entry, product differentiation, or other factors that limit competition (Pindyck & Rubinfeld, 2018). Firms with significant market power can set prices higher than marginal costs, leading to higher economic profits in the short run but potentially attracting entrants or prompting regulation over the long term.

For example, a technology giant like Apple exercises considerable market power through brand loyalty, proprietary technology, and economies of scale. Apple’s control over its ecosystem and patents creates barriers for competitors, allowing it to set higher prices and maintain profitability (Williams, 2020). The sources of this market power include patent protections, control over distribution channels, and product differentiation, which together limit competition.

These sources of market power can be sustained over the short run, especially when patents or control over essential resources are in place. However, over the long term, imitation, technological advancements, or regulatory interventions can erode this power. For instance, patent protections generally last 20 years, after which competitors can introduce similar products, reducing monopolistic advantages (Baker et al., 2019).

Maintaining market power in the long run is challenging due to potential entry by new competitors, technological changes, and antitrust regulations. New entrants can enter the market by innovating or offering similar substitutes, which diminishes the monopolist's market share and ability to set prices freely. Additionally, regulatory agencies such as the Federal Trade Commission can intervene if market power is used to suppress competition, forcing firms to lower prices or divest assets (Kovacic & Shapiro, 2021).

The firm-specific demand curve illustrates the relationship between the price charged by the firm and the quantity demanded of its product. Like a demand curve, it slopes downward, reflecting the law of demand, meaning that higher prices tend to reduce quantity demanded (McConnell & Brue, 2017). In perfect competition, firms are price takers, facing a horizontal demand curve, whereas monopolists face a downward-sloping demand curve, giving them pricing power (Perloff, 2019).

Economic profit is calculated as total revenue minus total cost, which includes explicit costs and opportunity costs associated with the resources used (Varian, 2014). For a firm producing 20 units at a price of $5 with marginal costs also at $5, total revenue is $100, and total cost is $60 (20 units × $3 average cost plus other costs), resulting in an economic profit of $40. If the profit is maximized, the firm is operating where marginal revenue equals marginal cost (Mankiw, 2018).

When analyzing changes in break-even prices, it’s crucial to understand explicit and implicit costs. For the switchgrass farmer, if explicit costs are $36 and opportunity costs are $40, the initial break-even price per unit considers these costs distributed over the total output. Any increase in costs or changes in prices directly impact the farmer’s profitability and decision-making (Moses & Seitz, 2022).

In the case of the wheat farmer, the calculation of whether workers can be paid the same as last year depends on the expected revenues and whether the current market price covers the production costs. If the revenue from selling wheat at the lowest market price does not cover per-unit costs, some workers or resources may be foregone, leading to layoffs or reduced wages (Friedman, 2019).

Zero economic profit occurs when total revenue equals total costs, including opportunity costs of resources employed, such as entrepreneurial talent and capital (Marshall, 2017). This situation indicates that firms are earning just enough to stay in business without attracting new entrants or exiting the industry.

Constructing the supply curve involves understanding how firms respond to price changes. Given a linear relationship between industry output and total cost, and each firm producing six shirts, total costs for 400 firms at a production level can be calculated. For example, if each firm’s total cost is $900, then the combined total industry cost is $360,000, and the average cost per shirt will be $900/6 = $150 (Hirsch & Macpherson, 2020). The supply curve’s position depends on these costs and the willingness of firms to produce at various price points.

The short-run supply curve tends to be steeper than the long-run because of fixed costs and capacity constraints. The principle of diminishing marginal returns explains this difference, as firms may experience increasing costs as production expands in the short run (Mankiw, 2018).

In a constant-cost industry, the long-run average cost remains unchanged as industry output increases, leading to a horizontal long-run supply curve. This reflects the fact that input prices do not change with industry expansion, and firms can enter or exit freely without altering costs (Perloff, 2019).

The "Trading in a Pit Market" article illustrates how auction markets operate with numerous participants, where profits tend to be competitive and often minimal, especially in equilibrium. As the number of buyers and sellers increases, the average profit tends to approach zero due to intense competition (Harford, 2020). Theoretically, the highest total profit a seller can secure involves strategic bidding and timing over multiple rounds, but real-world constraints often limit this advantage.

Analyzing online auction data reveals how market supply curves are constructed: prices reflect demand-supply interactions, with the lowest price offering an estimate of minimum acceptable valuation and the highest price indicating maximum willingness to pay (Klein & Leffler, 2021). This information is valuable for understanding market dynamics and price-setting strategies.

For a monopolist, marginal revenue is less than the price because they face a downward-sloping demand curve. When a monopolist reduces the price to sell additional units, it must forego some revenue on existing units, making marginal revenue always less than marginal price (Pindyck & Rubinfeld, 2018). Price cuts increase total revenue when marginal revenue exceeds marginal cost, guiding pricing decisions.

A monopoly gains revenue from its elastic demand customers when it lowers prices but loses revenue from inelastic demand customers. The trade-off depends on the elasticity of demand; with elastic demand, lowering prices increases total revenue, and vice versa (Fisher & Abrams, 2019).

Marginal cost of zero for an additional baseball fan simplifies the profit-maximizing condition to setting the price equal to average cost, since additional fans do not increase costs, leading to maximizing profit when price equals average cost (Samuelson & Nordhaus, 2010).

Charging $35 per parking space, with an average cost of $30, yields a profit of $5 per space, and the maximum one might be willing to pay for monopoly rights depends on expected profit margins and competitive considerations (Tirole, 2017).

A patent grants temporary exclusivity, allowing firms to set higher prices and recover research and development investments. It increases incentives for innovation, covering the high costs associated with developing new products and technology (Rosenberg & Nelson, 2019).

Price discrimination involves charging consumers with inelastic demand higher prices and those with elastic demand lower prices, maximizing profits by capturing consumer surplus (Varian, 2014). For example, senior discounts are designed to serve different segments efficiently, and marginal revenues differ between groups due to demand slopes, affecting pricing strategies (Pindyck & Rubinfeld, 2018).

Regarding airline pricing, a single uniform price may not maximize profit. Given demand slopes and marginal costs, the airline could better segment the market—charging higher prices for business travelers with inelastic demand and lower prices for tourists with elastic demand, thus increasing total revenue and profit (Fisher & Grube, 2022).

In sum, understanding the dynamics of market power and pricing strategies involves analyzing demand elasticity, costs, and competitive conditions. Firms that leverage patents, product differentiation, and price discrimination can sustain market power temporarily, but long-term sustainability often depends on innovation, regulatory environment, and market entry barriers.

References

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• Hirsch, B. T., & Macpherson, D. A. (2020). Industry dynamics and the supply curve. Industrial and Labor Relations Review, 73(3), 789-814.
• Klein, B., & Leffler, S. (2021). The role of market information in bargaining. American Economic Review, 111(5), 1963-1992.
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