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Microeconomics

Michael Parkin

Chapter 14

MONOPOLISTIC COMPETITION - all with Video Answers

Educators

Chapter Questions

03:50

Problem 1

Which of the following items are sold by firms in monopolistic competition? Explain your selections.
- Cable television service
- Wheat
- Athletic shoes
- Soda
- Toothbrushes
- Ready-mix concrete

Alejandro Ruiz
Alejandro Ruiz
Numerade Educator
03:25

Problem 2

The four-firm concentration ratio for audio equipment makers is 30 and for electric lamp makers it is 89 . The HHI for audio equipment makers it is 415 and for electric lamp makers it is 2,850 . Which of these markets is an example of monopolistic competition?

Alejandro Ruiz
Alejandro Ruiz
Numerade Educator
05:15

Problem 3

Use the following information to work Problems 3 and 4.
Sara is a dot.com entrepreneur who has established a Web site at which people can design and buy sweatshirts. Sara pays $$\$ 1,000$$ a week for her Web server and Internet connection. The sweatshirts that her customers design are made to order by another firm, and Sara pays this firm $$\$ 20$$ a sweatshirt. Sara has no other costs. The table sets out the demand schedule for Sara's sweatshirts.
$$
\begin{array}{cc}
\begin{array}{c}
\text { Price } \\
\text { (dollars per sweatshirt) }
\end{array} & \begin{array}{c}
\text { Quantity demanded } \\
\text { (sweatshirts per week) }
\end{array} \\
\hline 0 & 100 \\
20 & 80 \\
40 & 60 \\
60 & 40 \\
80 & 20 \\
100 & 0
\end{array}
$$
Calculate Sara's profit-maximizing output, price, and economic profit.

EB
Elsa Borrello
Numerade Educator
05:15

Problem 4

Sara is a dot.com entrepreneur who has established a Web site at which people can design and buy sweatshirts. Sara pays $$\$ 1,000$$ a week for her Web server and Internet connection. The sweatshirts that her customers design are made to order by another firm, and Sara pays this firm $$\$ 20$$ a sweatshirt. Sara has no other costs. The table sets out the demand schedule for Sara's sweatshirts.
$$
\begin{array}{cc}
\begin{array}{c}
\text { Price } \\
\text { (dollars per sweatshirt) }
\end{array} & \begin{array}{c}
\text { Quantity demanded } \\
\text { (sweatshirts per week) }
\end{array} \\
\hline 0 & 100 \\
20 & 80 \\
40 & 60 \\
60 & 40 \\
80 & 20 \\
100 & 0
\end{array}
$$
a. Do you expect other firms to enter the Web sweatshirt business and compete with Sara?
b. What happens to the demand for Sara's sweatshirts in the long run? What happens to Sara's economic profit in the long run?

EB
Elsa Borrello
Numerade Educator
01:35

Problem 5

Use the following figure, which shows the situation facing a producer of running shoes, to work Problems 5 to 10
(GRAPH CAN'T COPY)
What quantity does the firm produce, what price does it charge, and what is its economic profit or economic loss?

Zach Steedman
Zach Steedman
Numerade Educator
01:28

Problem 6

(GRAPH CAN'T COPY)
In the long run, how does the number of firms producing running shoes change?

Rashmi Sinha
Rashmi Sinha
Numerade Educator

Problem 7

(GRAPH CAN'T COPY)
In the long run, how does the price of running shoes and the quantity the firm produces change? What happens to the market output?

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01:28

Problem 8

(GRAPH CAN'T COPY)
Does the firm have excess capacity in the long run? If the firm has excess capacity in the long run, why doesn't it decrease its capacity?

Rashmi Sinha
Rashmi Sinha
Numerade Educator
03:16

Problem 9

(GRAPH CAN'T COPY)
In the long run, compare the price of a pair of running shoes and the marginal cost of producing the pair.

Regina Hays
Regina Hays
Numerade Educator

Problem 10

(GRAPH CAN'T COPY)
Is the market for running shoes efficient or inefficient in the long run? Explain your answer.

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02:26

Problem 11

Wake Up and Smell the Coffee
Every change that Starbucks made over the past few years-automated espresso machines, preground coffee, drive-throughs, fewer soft chairs and less carpeting - was made for a reason: to smooth operations or boost sales. Those may have been the right choices at the time, but together they ultimately diluted the coffee-centric experience. By 2008, Starbucks experienced a drop in traffic as customers complained that in pursuing rapid growth, the company has strayed too far from its roots. Starbucks will once again grind beans in its stores for drip coffee, give free drip refills, and provide two hours of wi-fi. The company will roll out its new sleek, low-rise espresso machine that makes baristas more visible.
a. Explain how Starbucks' past attempts to maximize profits ended up eroding product differentiation.
b. Explain how Starbucks' new plan intends to increase economic profit.

Jake Zanazzi
Jake Zanazzi
Numerade Educator

Problem 12

The Shoe That Won't Quit
I finally decided to take the plunge and buy a pair of Uggs, but when I got around to shopping for my Uggs, the style that I wanted was sold out. The scarcity factor was not a glitch in the supply chain, but rather a carefully calibrated strategy by Ugg's parent Deckers Outdoor that is one of the big reasons behind the brand's success. Deckers tightly controls distribution to ensure that supply does not outstrip demand. If Deckers ever opened up the supply of Uggs to meet demand, sales would shoot up like a rocket, but they'd come back down just as fast.
a. Explain why Deckers intentionally restricts the quantity of Uggs that the firm sells.
b. Draw a graph to illustrate how Deckers maximizes the economic profit from Uggs.

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11:14

Problem 13

Use the following information to work Problems 13 to 16 .
Suppose that Tommy Hilfiger's marginal cost of a jacket is a constant $$\$ 100$$ and the total fixed cost at one of its stores is $$\$ 2,000$$ a day. This store sells 20 jackets a day, which is its profit-maximizing number of jackets. Then the stores nearby start to advertise their jackets. The Tommy Hilfiger store now spends $$\$ 2,000$$ a day advertising its jackets, and its profit-maximizing number of jackets sold jumps to 50 a day.
a. What is this store's average total cost of a jacket sold before the advertising begins?
b. What is this store's average total cost of a jacket sold after the advertising begins?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
11:14

Problem 14

Suppose that Tommy Hilfiger's marginal cost of a jacket is a constant $$\$ 100$$ and the total fixed cost at one of its stores is $$\$ 2,000$$ a day. This store sells 20 jackets a day, which is its profit-maximizing number of jackets. Then the stores nearby start to advertise their jackets. The Tommy Hilfiger store now spends $$\$ 2,000$$ a day advertising its jackets, and its profit-maximizing number of jackets sold jumps to 50 a day.
a. Can you say what happens to the price of a Tommy Hilfiger jacket? Why or why not?
b. Can you say what happens to Tommy's markup? Why or why not?
c. Can you say what happens to Tommy's economic profit? Why or why not?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
11:14

Problem 15

Suppose that Tommy Hilfiger's marginal cost of a jacket is a constant $$\$ 100$$ and the total fixed cost at one of its stores is $$\$ 2,000$$ a day. This store sells 20 jackets a day, which is its profit-maximizing number of jackets. Then the stores nearby start to advertise their jackets. The Tommy Hilfiger store now spends $$\$ 2,000$$ a day advertising its jackets, and its profit-maximizing number of jackets sold jumps to 50 a day.
How might Tommy Hilfiger use advertising as a signal? How is a signal sent and how does it work?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
11:14

Problem 16

Suppose that Tommy Hilfiger's marginal cost of a jacket is a constant $$\$ 100$$ and the total fixed cost at one of its stores is $$\$ 2,000$$ a day. This store sells 20 jackets a day, which is its profit-maximizing number of jackets. Then the stores nearby start to advertise their jackets. The Tommy Hilfiger store now spends $$\$ 2,000$$ a day advertising its jackets, and its profit-maximizing number of jackets sold jumps to 50 a day.
How does having a brand name help Tommy Hilfiger to increase its economic profit?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
03:54

Problem 17

Use the following news clip to work Problems 17 and 18 .
Food's Next Billion-Dollar Brand?
While it's not the biggest brand in margarine, Smart Balance has an edge on its rivals in that it's made with a patented blend of vegetable and fruit oils that has been shown to help improve consumers' cholesterol levels. Smart Balance sales have skyrocketed while overall sales for margarine have stagnated. It remains to be seen if Smart Balance's healthy message and high price will resound with consumers.
How do you expect advertising and the Smart Balance brand name will affect Smart Balance's ability to make a positive economic profit?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
03:54

Problem 18

Food's Next Billion-Dollar Brand?
While it's not the biggest brand in margarine, Smart Balance has an edge on its rivals in that it's made with a patented blend of vegetable and fruit oils that has been shown to help improve consumers' cholesterol levels. Smart Balance sales have skyrocketed while overall sales for margarine have stagnated. It remains to be seen if Smart Balance's healthy message and high price will resound with consumers.
Are long-run economic profits a possibility for Smart Balance? In long-run equilibrium, will Smart Balance have excess capacity or a markup?

Jennifer Stoner
Jennifer Stoner
Numerade Educator

Problem 19

Computer Makers Prepare to Stake Bigger Claim in Phones
Emboldened by Apple's success with its iPhone, many PC makers and chip companies are charging into the mobile-phone business, promising new devices that can pack the horsepower of standard computers into palm-size packagesdevices that handle the full glory of the Internet, power two-way video conferences, and stream high-definition movies to your TV. It is a development that spells serious competition for established cell-phone makers and phone companies.
Source: The New York Times, March 15, 2009
a. Draw a graph of the cost curves and revenue curves of a cell-phone company that makes a positive economic profit in the short run.
b. If cell-phone companies start to include the popular features introduced by PC makers, explain how this decision will affect their profit in the short run.
c. What do you expect to happen to the cellphone company's economic profit in the long run, given the information in the news clip?
d. Draw a graph to illustrate your answer to part (c).

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03:50

Problem 20

Which of the following items are sold by firms in monopolistic competition? Explain your selection.
- Orange juice
- Canned soup
- PCs
- Chewing gum
- Breakfast cereals
- Corn

Alejandro Ruiz
Alejandro Ruiz
Numerade Educator
02:19

Problem 21

The HHI for automobiles is 2,350 , for sporting goods it is 161 , for batteries it is 2,883 , and for jewelry it is 81 . Which of these markets is an example of monopolistic competition?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
05:50

Problem 22

Use the following information to work Problems 22 and 23 .
Lorie teaches singing. Her fixed costs are $$\$ 1,000 \mathrm{a}$$ month, and it costs her $$\$ 50$$ of labor to give one class. The table shows the demand schedule for Lorie's singing lessons.
$$
\begin{array}{cc}
\begin{array}{c}
\text { Price } \\
\text { (dollars per lesson) }
\end{array} & \begin{array}{c}
\text { Quantity demanded } \\
\text { (lessons per month) }
\end{array} \\
\hline 0 & 250 \\
50 & 200 \\
100 & 150 \\
150 & 100 \\
200 & 50 \\
250 & 0
\end{array}
$$
Calculate Lorie's profit-maximizing output, price, and economic profit.

Hrithvik Gadhiya
Hrithvik Gadhiya
Numerade Educator
06:44

Problem 23

Lorie teaches singing. Her fixed costs are $$\$ 1,000 \mathrm{a}$$ month, and it costs her $$\$ 50$$ of labor to give one class. The table shows the demand schedule for Lorie's singing lessons.
$$
\begin{array}{cc}
\begin{array}{c}
\text { Price } \\
\text { (dollars per lesson) }
\end{array} & \begin{array}{c}
\text { Quantity demanded } \\
\text { (lessons per month) }
\end{array} \\
\hline 0 & 250 \\
50 & 200 \\
100 & 150 \\
150 & 100 \\
200 & 50 \\
250 & 0
\end{array}
$$
a. Do you expect other firms to enter the singing lesson business and compete with Lorie?
b. What happens to the demand for Lorie's lessons in the long run? What happens to Lorie's economic profit in the long run?

Jiapeng Guo
Jiapeng Guo
Numerade Educator
View

Problem 24

Use the following figure, which shows the situation facing Mike's Bikes, a producer of mountain bikes, to work Problems 24 to 28 . The demand and costs of other mountain bike producers are similar to those of Mike's Bikes.
(FIGURE CAN'T COPY)
What quantity does the firm produce and what is its price? Calculate the firm's economic profit or economic loss.

Rashmi Sinha
Rashmi Sinha
Numerade Educator

Problem 25

The demand and costs of other mountain bike producers are similar to those of Mike's Bikes.
(FIGURE CAN'T COPY)
What will happen to the number of firms producing mountain bikes in the long run?

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Problem 26

The demand and costs of other mountain bike producers are similar to those of Mike's Bikes.
(FIGURE CAN'T COPY)
a. How will the price of a mountain bike and the number of bikes produced by Mike's Bikes change in the long run?
b. How will the quantity of mountain bikes produced by all firms change in the long run?

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Problem 27

The demand and costs of other mountain bike producers are similar to those of Mike's Bikes.
(FIGURE CAN'T COPY)
Is there any way for Mike's Bikes to avoid having excess capacity in the long run?

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Problem 28

The demand and costs of other mountain bike producers are similar to those of Mike's Bikes.
(FIGURE CAN'T COPY)
Is the market for mountain bikes efficient or inefficient in the long run? Explain your answer.

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Problem 29

Use the following news clip to work Problems 29 and 30 .
Groceries for the Gourmet Palate
No food, it seems, is safe from being repackaged to look like an upscale product. Samuel Adams' $$\$ 120$$ Utopias, in a ridiculous copper-covered $24-\mathrm{oz}$. bottle meant to resemble an old-fashioned brew kettle, is barely beer. It's not carbonated like a Bud, but aged in oak barrels like scotch. It has a vintage year, like a Bordeaux, is light, complex, and free of any alcohol sting, despite having six times as much alcohol content as a regular can of brew.
a. Explain how Samuel Adams has differentiated its Utopias to compete with other beer brands in terms of quality, price, and marketing.
b. Predict whether Samuel Adams produces at, above, or below the efficient scale in the short run.

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Problem 30

Groceries for the Gourmet Palate
No food, it seems, is safe from being repackaged to look like an upscale product. Samuel Adams' $$\$ 120$$ Utopias, in a ridiculous copper-covered $24-\mathrm{oz}$. bottle meant to resemble an old-fashioned brew kettle, is barely beer. It's not carbonated like a Bud, but aged in oak barrels like scotch. It has a vintage year, like a Bordeaux, is light, complex, and free of any alcohol sting, despite having six times as much alcohol content as a regular can of brew.
a. Predict whether the $\$ 120$ price tag on the Utopias is at, above, or below marginal cost:
(i) In the short run.
(ii) In the long run.
b. Do you think that Samuel Adams Utopias makes the market for beer inefficient?

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03:25

Problem 31

Use the following news clip to work Problems 31 and 32 .
Swinging for Female Golfers
One of the hottest areas of innovation is in clubs for women, who now make up nearly a quarter of the 24 million golfers in the United States. Callaway and Nike, two of the leading golf-equipment manufacturers, recently released new clubs designed specifically for women.
a. How are Callaway and Nike attempting to maintain economic profit?
b. Draw a graph to illustrate the cost curves and revenue curves of Callaway or Nike in the market for golf clubs for women.
c. Show on your graph in part (b) the short-run economic profit.

Shu Naito
Shu Naito
Numerade Educator
03:25

Problem 32

Swinging for Female Golfers
One of the hottest areas of innovation is in clubs for women, who now make up nearly a quarter of the 24 million golfers in the United States. Callaway and Nike, two of the leading golf-equipment manufacturers, recently released new clubs designed specifically for women.
a. Explain why the economic profit that Callaway and Nike make on golf clubs for women is likely to be temporary.
b. Draw a graph to illustrate the cost curves and revenue curves of Callaway or Nike in the market for golf clubs for women in the long run. Mark the firm's excess capacity.

Shu Naito
Shu Naito
Numerade Educator
01:57

Problem 33

Use the following information to work Problems 33 to 35 .
Bianca bakes delicious cookies. Her total fixed cost is $$\$ 40$$ a day, and her average variable cost is $$\$ 1$$ a bag. Few people know about Bianca's Cookies, and she is maximizing her profit by selling 10 bags a day for $$\$ 5$$ a bag. Bianca thinks that if she spends $$\$ 50$$ a day on advertising, she can increase her market share and sell 25 bags a day for $$\$ 5$$ a bag.
If Bianca's advertising works as she expects, can she increase her economic profit by advertising?

Alejandro Ruiz
Alejandro Ruiz
Numerade Educator

Problem 34

Bianca bakes delicious cookies. Her total fixed cost is $$\$ 40$$ a day, and her average variable cost is $$\$ 1$$ a bag. Few people know about Bianca's Cookies, and she is maximizing her profit by selling 10 bags a day for $$\$ 5$$ a bag. Bianca thinks that if she spends $$\$ 50$$ a day on advertising, she can increase her market share and sell 25 bags a day for $$\$ 5$$ a bag.
If Bianca advertises, will her average total cost increase or decrease at the quantity produced?

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01:23

Problem 35

Bianca bakes delicious cookies. Her total fixed cost is $$\$ 40$$ a day, and her average variable cost is $$\$ 1$$ a bag. Few people know about Bianca's Cookies, and she is maximizing her profit by selling 10 bags a day for $$\$ 5$$ a bag. Bianca thinks that if she spends $$\$ 50$$ a day on advertising, she can increase her market share and sell 25 bags a day for $$\$ 5$$ a bag.
If Bianca advertises, will she continue to sell her cookies for $$\$ 5$$ a bag or will she change her price?

Carson Merrill
Carson Merrill
Numerade Educator

Problem 36

Use the following news clip to work Problems 36 and 37.
A Thirst for More Champagne
Champagne exports have tripled in the past 20 years. That poses a problem for northern France, where the bubbly hails from-not enough grapes. So French authorities have unveiled a plan to extend the official Champagne grape-growing zone to cover 40 new villages. This revision has provoked debate. The change will take several years to become effective. In the meantime the vineyard owners whose land values will jump markedly if the changes are finalized certainly have reason to raise a glass.
a. Why is France so strict about designating the vineyards that can use the Champagne label?
b. Explain who most likely opposes this plan.

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Problem 37

A Thirst for More Champagne
Champagne exports have tripled in the past 20 years. That poses a problem for northern France, where the bubbly hails from-not enough grapes. So French authorities have unveiled a plan to extend the official Champagne grape-growing zone to cover 40 new villages. This revision has provoked debate. The change will take several years to become effective. In the meantime the vineyard owners whose land values will jump markedly if the changes are finalized certainly have reason to raise a glass.
Assuming that vineyards in these 40 villages are producing the same quality of grapes with or without this plan, why will thcir land values "jump markedly" if this plan is approved?

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02:05

Problem 38

Under Armour's Big Step Up
Under Armour, the red-hot arhletic-apparel brand, has joined Nike, Adidas, and New Balance as a major player in the market for athletic footwear. Under Armour plans to revive the long-dead cross-training category. But will young athletes really spend $$\$ 100$$ for a cross training shoe to lift weights in?
What factors influence Under Armour's ability to make an economic profit in the cross-training shoe market?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
03:43

Problem 39

After you have studied Reading Between the Lines on pp. 334-335 answer the following questions.
a. Describe the cost curves (MC and $A T C$ ) and the marginal revenue and demand curves for the iPhone when Apple first introduced it.
b. How do you think the creation of the iPhone influenced the demand for older generation cell phones?
c. Explain the effects of the introduction of the $3 \mathrm{G}$ iPhone on HTC and other firms in the market for smart phones.
d. Draw a graph to illustrate your answer to part (c).
e. Explain the effect on Apple of the decisions by BlackBerry and HTC to bring their own smart phones to market.
f. Draw a graph to illustrate your answer to part (e).
g. Do you think the smart phone market is efficient? Explain your answer.
h. Do you predict that producers of smart phones have excess capacity? Explain your answer.

Heather Duong
Heather Duong
Numerade Educator