Question

Consider the competitive market for seltzer and assume the following:

i. Seltzer may be sold in cans or bottles with a marginal cost of $.50 in either case.

ii. When seltzer is sold in a can, there is a 1/10,000 chance that an accident will occur, but when seltzer is sold in a bottle, there is a 1/1,000 chance that an accident will occur. Let the average accident cost be $1,000 in either situation.

iii. Producers and consumers are fully informed and risk neutral. Also, courts do not make errors and always award compensatory damages in situations where seltzer manufacturers are found liable.

Consider each of the following legal regimes: a) no liability; b) strict liability; and c) a negligence standard with due care defined as packaging seltzer in a can.

2a. What will be the list price of seltzer under each legal regime? Is there any reason to prefer one legal regime over another on efficiency grounds? Why or why not? (HINT: what is the effective price of seltzer in each legal regime?)

Answer 1

Q 22. Option A

This is the reason for downward sloping demand curve faced by a monopoly. The lowering of price results in price effect and quantity effect that entails that prices need to be reduced to sell more.

Q 23. Option D

Monopolies have downward sloping demand and MR curves so that MR can be negative but perfectly competitive firms have horizontal MR which stays fixed.

Q 24 Option B

Profit = (P - ATC)*Q = (12 - 5)*10 = $70

Q 26. Option A

Private monoply will reduce cost because it has an objective to earn profit. Government run monopoly is a wasteful entity that has no incentive to reduce cost and increase efficiency

Q 27 Option B

There are not many sellers but only a few firms supply to the market. In monopolistically competitive market, the market structure allows limited barriers to entry so that many firms competing for price and non-price variables such as, product design, creativity, quantity to be produced, advertising, etc. the product sold in these market is highly differentiated.

Q28. Option D

Q29. Option A