Question

1. Assume the cost data is for a perfectly competitive firm:
   

Q	AFC	AVC	ATC	MC
1	60	45	105	45
2	30	42.5	72.5	40
3	20	40	60	35
4	15	37.5	52.5	30
5	12	37	49	35
6	10	37.5	47.5	40
7	8.57	38.57	47.14	45
8	7.5	40.63	48.13	55
9	6.67	43.33	50	65
10	6	46.5	52.5	75

1. Complete the following table:

	P = 56	P = 40	P = 32
Will this firm produce in the short run (yes or no)?
What is the profit maximizing output?
What economic profit or loss?

2. What is the long run equilibrium price?
3. What is the shut-down price?

MKT %	Brewery
41	AB InBev
14	Molson Coors
12	SAB Miller
6	Constellation
4	Heineken
1.5	Yuengling
1.5	Samuel Adams
1	20 others

2. (5 points) Use the above market share date to answer the following questions. Show your work.

1. What is the four-firm concentration ratio before the merger?
2. What is the industry HHI before the merger?
3. AB InBev and SAB Miller propose a merger. What is the industry HHI after the merger?
4. Using the HHI results, explain your recommendation for the merger (block or approve)

                                                                                                                                                                        

                                                                                                                            

                MC                                  ATC                                                

               30

               18

                8

                                                                                                                                                                                                                                                                                                                                                                                                                                  MR                                                                                                                                                            D

                                                                                                         20             33             40

A.  What quantity and price will a monopolist produce and charge?

               

B.  Suppose the government decides to impose a price ceiling of $18.  What quantity will the monopolist produce?

(5 points) True (T), False (F), or Uncertain (U)

1. A monopolist will charge the highest possible price.
2. In long run equilibrium, monopolistic competition achieves productive efficiency.
3. Limit pricing is a way for existing firms in an industry to prevent entry.
4. Cartels face many obstacles that may disrupt its market (monopoly) power.
5. Game theory illustrates the advantage for a firm to ignore a rival’s strategy.

Answer 1

ai) Shut Down Rule

If P > AVC operate in the short run.

If price is above average variable cost for each unit produced and sold, the firm earns enough revenue to pay variable costs (since price is greater) and has added revenues to offset fixed costs as we showed graphically.

If P < AVC shut down in the short run.

If price is below average variable cost for each unit produced and sold, the firm earns less revenue than the added variable costs it incurs (remember it only incurs variable costs if it produces). Therefore, the added revenue is less than the added cost, so losses are greater than just fixed costs.

In this case at P = 56 firm will operate in short run as P > AVC.

When P = 40, P = 32 firm will shut down because P < AVC.

ii) The Profit Maximizing Output occurs at point where P = MR = MC. Or we can say that when P or MR > MC. In this case till 8th unit of Output P or MR > MC. So, Profit maximizing output is 8 units.

iii)

Q	ATC	TC	TR	MR	MC	Profit
1	105	105	56			-49
2	72.5	145	112	56	40	-33
3	60	180	168	56	35	-12
4	52.5	210	224	56	30	14
5	49	245	280	56	35	35
6	47.5	285	336	56	40	51
7	47.14	329.98	392	56	45	62
8	48.13	385.04	448	56	55	63
9	50	450	504	56	65	54
10	52.5	525	560	56	75	35

Economic Profit

Maximum Profit occurs at 8 th Unit of Output.

Total Revenue = $ 448

Total Cost = $385.04

Economic Profit = $448 - $385.04 = $63

b) Shut Down price is Minimum of AVC ie $37.

c) The long-run equilibrium price will be equal to marginal cost (or ATC) when MC=ATC. In this case at 7th unit MC is the most closest to ATC. So, Long run equilibrium price is $47.14.

In the long-run, companies that are engaged in a perfectly competitive market earn zero economic profits. The long-run equilibrium point for a perfectly competitive market occurs where the demand curve (price) intersects the marginal cost (MC) curve and the minimum point of the average cost (AC) curve.