A.What Price Should Your Firm Charge Its Customers?

PROBLEM SET #6

Matching

The terms on the left are associated with the conditions on the right. Match them by placing the appropriate letter in the space provided.

______1. / long run / A.FC = 0
______2. / Concentrated industry / B.(TC – TVC)/Q
______3. / Profit maximizing output for perfectly competitive firm / C.(P - ATC) x Q
______4. / reduce output / D.High C4
______5. / break-even / E.sunk cost
____ 6. / short run losses / F.fixed plant and equipment
_____7. / short run / G.P < ATC
______8. / total profit / H.MR < MC
______9. / average fixed costs / I.ATC = P
______10. / Barrier to entry / J.P=MC

Q.2

You manage a firm that competes against many other firms in a highly competitive industry. Over the last decade, several firms have left this industry and as a consequence, you are earning zero economic profit. Furthermore, the four-firm concentration ratio and the Herfindahl-Hirschman Index are both quite small and the Rothschild index is not significantly greater than zero. Based on this information, explain to your boss, which market structure best characterizes the industry in which you compete. Explain fully (4 lines)

Q.3Your firm has $1 million in sales, a Lerner index of 0.65, and a marginal cost of $35, and competes against 1000 other firms in your relevant market

a.What price should your firm charge its customers?

b.by what factor does your firm mark up its price over marginal cost?

c.do you think your firm enjoys much market power? Explain

Q.4

In 1990, 3 firms supply photographic equipment in the United States (fictitious), Kodak, Fuji and Sony. There was a bit of difference in the quality of equipment produced by these firms, so it was not surprising that Kodak’s market share was 60%. The own price elasticity of demand for Kodak equipment was -3.0 and the market elasticity of demand was -2.75. Suppose that in the 1990s, the average retail price of a photo equipment was $450 and that Kodak’s marginal cost was $200per equipment, based on this information, discuss the industry concentration, demand and market conditions and the pricing behavior of Kodak in the 1990s. (4 lines)

Q.4

During a sales meeting one of the regional managers of your firm remarked that conduct variables such as industry concentration, market conditions and potential for entry, by rival firms were likely to hamper the firm's sales over the next year. Is this manager argument correct in the general sense? (2 lines)

Q.5

True or False and why? “If it cost $20 on average to produce 100 units of x and it costs $20.20 on average to produce 101 units of x, then the marginal cost when producing unit #101 is 20 cents” (2 lines)

Q.6

Heard in a meeting: “In textbooks, labor appears as a variable input, and thus, a component of variable costs. I understand, of course, that this is a simplification. I also took business economics courses with Dr. Rosmy. I know the story. However, at our firm, labor is a fixed cost. Why? For a very simple reason: We cannot reduce wages in this firm. When a firm is unable to reduce wages, then, obviously, labor costs must be a component of fixed cost”. Do you agree with the statement? Why?

Q.7

How would each of the following affect the firm's marginal, average, and average variable cost curves?

a. An increase in wages

b. The rent that the firm pays on the building that it leases decreases