Market structure

A producer of cement has a monopoly of the market in the area adjoining his plant, but is an insignificant factor in the rest of the country, where there are many competing producers. He can sell any desired portion of his output in the competitive market at the price there prevailing. Given the price prevailing in the competitive market, the demand schedule in his own monopolized market, his own average cost schedule, and any additional information which may be necessary for the solution of the problem, find the price he should charge in his own market, and the quantities he should sell in each market, to maximize his net revenue.

Answer (a) or (b), but not both.

(a) The final degree of utility curves of A and B for corn (X) and beef (Y) are as follows, the small letters x and y representing the quantities of X and Y consumed by the person indicated by the subscript.

For person A: $f_a(x_a)=-\frac{3}{2}{x}_a+\frac{19}{2}$ for corn (X); ${\varphi }_a(y_a)=-\frac{1}{2}{y}_a+6$ for beef (Y).

For person B: $f_b(x_b)=-\frac{3}{8}{x}_b+5$ for corn (X); ${\varphi }_b(y_b)=-y_b+7$ for beef (Y).

The total market supply of corn is $x=x_a+x_b=14$ and the total market supply of beef is $y=y_a+y_b=8$.

Without performing any numerical computations, explain how to deduce the combined demand curves of A and B for corn in terms of beef and for beef in terms of corn.

(b) Is there an equilibrium price and output when a commodity is produced by two competing monopolists? Discuss this problem touching on the solutions of Cournot, Edgeworth, Amoroso, and Wicksell.

(Answer both parts)

A. Defined or very briefly describe:

(1) Inelastic demand

(2) Elastic demand

(3) Incremental (or marginal) revenue

(4) Perfect competition (in terms of demand elasticity)

(5) Pure profit

(6) Productivity (incremental or marginal of a particular agency or factor)

B. Is export dumping evidence of domestic monopoly? Explain. Under what conditions does export dumping lead to a lower domestic price in the exporting country?

(Answer either A or B)

A. State briefly the doctrine of market price and natural price of the early classical economists; contrast this with Marshall’s analysis of long-run and short on price, and give your own view of the correct classification of viewpoints with respect to time.

B. State and critically discuss the classical doctrine of productive and unproductive labor, and in view of the issues raised formulate a correct definition of production in economics.

Assuming that a monopolist always fixes price so as to maximize profits, can the price of a commodity ever be lower when it is monopolized than when it is competitively produced?

Briefly discuss the familiar diagram of a family of short-run cost curves for a firm, with an “envelope” as a long-run curve. State the main “cases” for price-equilibrium under monopoly and under “perfect competition.” Explain why the point of tangency with both curves descending may be such an equilibrium-supply, and particularly why it locates the minimum cost for the corresponding output.

Describe the cost curves for an individual firm, explaining the relation between short-run and long-run curves, average and marginal cost curve. Explain the equilibrium of the firm for various market conditions of competition.

b. Describe the demand curves on the part of the individual firm for factors of production under various market conditions of competition.

c. Demonstrate that (a) and (b) are fundamentally translations of one another.

The U.S. Steel Corporation produces about one-third of the total ingot steel production in the United States (and a similar proportion of mill shapes and other forms of steel sold to steel-using industries). If the price elasticity of demand for steel is -0.5, what is the minimum absolute value of the elasticity of demand facing the U.S. Steel Corporation? What is the maximum absolute value? What can you conclude, without further information, about the monopoly power of the U.S. Steel Corporation? What further information, if any, would be relevant, and why?

Indicate whether each of the following statements is true (T), false (F), or uncertain (U). Give a brief explanation of your answer.

If the income elasticity of demand for a product is greater than unity, the relative price of that product will rise as real per capita incomes increase, i.e., will rise relative to products with income elasticity less than unity.

When a firm is producing in a region of rising marginal cost, that firm is in equilibrium because average costs are increasing also.

The market price of steel and iron scrap fluctuates more than the price of finished steel primarily because the scrap market is competitive while the finished steel market is in the hands of monopolists.

If automobile firms overproduce and competition forces down the price of new cars, this harms a car owner who has purchased his car on credit since his mortgaged car has suffered a decline in price.

It is frequently stated that the more disagreeable or dirty a job is the more it will be necessary to pay workers, but this is contradicted by the fact that college professors earn more than foundry workers.

Lowering the support price of wheat in the United States at present would aggravate rather than relieve the problem of surpluses, since farmers would simply produce proportionately more in order to maintain their incomes.

An increase in demand for a commodity increases its price, but an increase in price reduces demand. Increases in demand tend, therefore, to be self-compensating.

Increasing the minimum wage rate to one dollar per hour will have little or no effect outside the South, since most workers now being paid less than one dollar per hour are in the South.

In the absence of factors making for an increase in demand, and other things being equal, a new method will be introduced sooner in a competitive than in a monopolized industry.

Without collective bargaining, the workers’ market disadvantage would enable the owners of other productive agencies to appropriate income that would otherwise go to labor.

With collective bargaining, workers in general can appropriate income from the owners of other agents.

In equilibrium, it is enough to know the marginal factor cost of any one factor and its marginal physical product to know the marginal cost of the product, even though the product is produced by many factors.

The demand for a product at the market price is inelastic. It follows that the product must be produced under conditions of net internal diseconomies.

Under competition, the marginal efficiency of capital is equal to the marginal physical product of a particular kind of capital good times the price of the product.

To assert that the rate at which a consumer is willing to substitute x for y decreases as the quantity of x increases along an indifference curve is equivalent to saying that the indifference curve is concave toward the origin.

“East coast gas wars are forcing big producers to chop prices to retailers. With some Manhattan service stations selling gas as low as 15.8¢ per gallon, Socony Mobil, Esso Standard Oil and others have cut wholesale prices up to ½¢ per gallon in most of the seaboard marketing area from Maine to Washington, D.C., the first price reduction in nearly a year” Time, July 25, 1955.

Explain why this quotation is bad economics.

Fair trade is now rapidly disappearing. However, a few firms (Sunbeam, Schaeffer) are actively trying to enforce fair trade pricing.

(a) Are these firms just misguided or are there circumstances in which fair trade would help them?

(b) If fair trade were generally observed, what would be the effect on return on capital and entrepreneurial effort engaged in retailing?

A recent court decree requires a company (The United Shoe Machinery Co.) which heretofore has only leased its machines, for which there are at present no competitors, to offer them for sale at prices which will make it neither more nor less advantageous to buy than to rent the machines. How can such prices be determined, and by what criteria can it be determined whether a given price meets the requirement?

Define (a) perfect competition, (b) oligopoly, (c) monopoly, (d) monopolistic competition, (e) cartel, (f) monopsony.

State the conditions of maximum return for the individual firm in a form in which they are applicable to all the preceding market conditions. Indicate the special form which these take for each of the preceding market conditions.

Define “length of run” and state is effect on these conditions.

Indicate whether each of the following statements is true (T), false (F), or uncertain (U). Explain briefly the basis for your answer.

_____. If the market elasticity of demand for peaches is -2, a peach producer whose output accounts for 1/20th of the total supply of peaches will be faced by a demand function of elasticity -40.

_____. If a constant amount of carpenters’ services is required per unit of housing constructed, and the elasticity of demand for housing is -1, the elasticity of demand for carpenters’ services used in housing must be less (in absolute value) than unity.

_____. If the production possibilities for wire can be represented by a Cobb-Douglas production function, and the wire industry is competitive, a rise of 10 per cent in the wages of wire-workers will lead to a reduction of 10 per cent in their employment.

_____. The elasticity of demand for a group of commodities with respect to the average price of the group can never be larger in absolute value than the largest of the individual price elasticities of the commodities which comprise the group.

_____. If total consumer expenditures are the same before and after a tax, then an excise tax on a consumer good of elastic demand will lead to an increase in consumer spending on other consumer goods, while an excise tax on a consumer good of inelastic demand will lead to a decline in consumer spending on other consumer goods.

_____. A tax of 10 per cent per year on the rental value (actual or imputed) of all land will in the long run lead to a lowering of the marginal productivity of labor in agriculture.

_____. A technological advance opening up widespread possibilities for new investment in the electronics industry at very high rates of return will tend to lower the real value of the existing stock of residential housing in the United States.

_____. A supply curve passing through the origin has an elasticity equal to unity.

_____. Given certainty, no firm would hold inventories.

_____. A negatively sloping supply curve of labor implies a positively sloping demand curve for leisure.

_____. It is impossible to derive a supply function for a monopolist.

_____. A legally enforced minimum wage for a particular occupation may increase employment in that occupation.

_____. Wage rates rise while interest rates remain the same. It follows that the ratio of capital to labor will increase.

_____. Engel’s laws are due to Friedrich Engels.

Indicate whether each of the following statements is true (T), false (F), or uncertain (U). Explain briefly the basis for your answer.

A tax on a product whose supply is of zero elasticity will have no effect on resource allocation.

If factors of production are used in absolutely fixed proportion in the production of a particular product, the demand for each of the factors by the producers of the product will be completely inelastic with respect to price.

Since 1951 interest rates have risen by about 50 percent whereas real wages have risen only by approximately 24 percent. This implies that firms are and will be using more labor per unit of capital than they did in 1950.

An income tax has no resource misallocating effects.

A competitive firm will increase its demand for factor A as a result of a fall in the price of factor B.

“A monopolist has no supply curve.” Hence it is impossible to predict his response to a shift in the demand curve facing him.

Budget studies have yielded an income elasticity of demand for food of .5 for urban families and of . 35 for farm families. This implies that farm families have substantially different tastes or consumption habits.

Price stabilization at the mean of fluctuating prices would harm consumers.

Product A is one of the major inputs used in the production of product B. Price control is imposed on product A, but not on product B, at a level below the equilibrium price of A. This will result in a fall of the price of B.

A tax of 50% of the gross sale price of all new automobiles in the U. S. will in the short run tend to double the market value of used automobiles, and in the long run tend to double the gross market price of new automobiles as well.

Describe the cost and supply aspects of the long-run equilibrium conditions under competition for two joint-products, when the proportions in which the two products are produced are: (a) non-variable, (b) variable.

Answer whether the statement is true, false, or uncertain. In each case, write a few sentences explaining your answer. Your grade will depend heavily on your explanation.

The elasticity of a linear supply function that passes through the origin is always unity.

If a firm is producing in the region of rising marginal costs, the firm is realizing profits.

An effective price ceiling on cotton, i.e., one that holds its price below the free market level, will decrease the price of textiles.

Steel prices and output usually move together during business cycles. This means that the income effect of a rise in price is greater than the substitution effect.

Firms try to minimize unit costs; at the point where unit costs are at a minimum, they equal marginal costs; therefore, firms tend to operate where their unit and marginal costs are equal.

Marginal productivity theory does not apply if factors are always used in fixed proportion.

Since all firms in competitive industry have the same marginal costs, it is meaningless to speak of more or less efficient firms.

If a Paasche price index is higher than the Laspeyres' index, tastes must have changed.

The demand for a product at the market price is inelastic. It follows that the product must be produced under conditions of net internal diseconomies.

“Commodities with higher, income elasticities have higher demand (price) elasticities.” (Stigler, 1952 ed., p. 45)

If X and Y are substitutes, a decline in the price of X can increase the amount of Y demanded only if Y is an inferior good.

The elasticity of demand for a group of commodities with respect to the average price of the group can never be larger in absolute value than the largest of the individual price elasticities of the commodities which comprise the group.

A rational consumer is insatiable.

A. The demand function for a product is P = 115 — Q. The total cost of producing Q units in one plant is given by TC = 400 — 100Q^{2} + Q^{3}. Only one-plant firms are allowed.

(a) What is the long run competitive solution (price, quantity, and the number of firms in this industry)?

(b) What would be the approximate price charged and the quantity produced if there was only one one-plant firm and it maximized its profits. (Work only with round figures.) How much profit would it make?

B. Assume now that a firm may have more than one plant. What is the monopoly solution? How much profit will it make?

Answer each question “true”, “false”, or “uncertain”, and explain your answer briefly. Your grade will depend heavily on your explanation.

A competitive firm will increase output as the result of a fall in the price of one of its inputs.

In equilibrium, a competitive firm has all the business (sales) it wants. Hence advertising is incompatible with either competition or equilibrium.

Duopolists with different cost functions cannot achieve a monopoly price without transfer payment between the firms.

A multiplant firm will schedule its output so that the marginal costs are equal in all plants.

The price of haircuts in Chicago is approximately 40 percent higher than in New York; therefore, average earnings of barbers in Chicago are higher than in New York.

The supply curve of a monopolist is inelastic at the point of maximum monopoly profit.

If it takes one day to catch a beaver and two to catch a deer, one deer will exchange for two beavers.

Assume that the world demand elasticity for tin is -2 and that Bolivia produces 1/3 of the world’s tin. Therefore, the elasticity of demand for Bolivian tin is at least -6.0 (in absolute value).

A safety ordinance prohibiting the use of automobiles older than 10 years will increase the long run demand for new automobiles.

The own-price elasticity of demand for a commodity is no smaller in absolute value, than the marginal propensity to consume that commodity.

For a single consumer the sum of income elasticities of demand for all commodities is unity, while the sum of their price elasticities is zero.

It is a convention in economics to draw consumption indifference curves convex to the origin, but we have no way of knowing whether they really are.

Each firm in an industry is given a license to operate and no new firms are allowed to enter. The value of a license rises over time. Does this prove that firms operate subject to diseconomies of scale?

Answer the following questions, true, false or uncertain and briefly defend your answer.

An increase in the demand for the product of a monopoly results in a rise in the price of the product.

A monopoly can never have a larger output and lower price than a competitive industry assuming that cost conditions would be the same for both.

The margin in stock trading is the fraction of the price of the stock which the trader must supply and the balance is lent to the trader by the broker. Hence the margin represents the trader’s equity and is analogous to a down payment. Assume there is no government regulation of the margin and that brokers are free to set any margin they please and to charge any interest rate they please on the loan they extend to traders. Assume there is perfect competition in the brokerage industry.

Would you expect margins to be higher during periods of “active” speculation?

Would you expect higher margins when stock prices are rising then when they are falling?

Would a rise in the interest compensate for or be equivalent to a rise in the margin?

I. Indicate whether each of the following statements is true (T), false (F), or uncertain (U) and state briefly (on this paper) the reason for your answer.

The elasticity of a straight line demand curve varies from point to point.

In the long run, demand has no influence on the price of the product of a competitive industry that uses no specialized resources.

Marginal revenue is always greater than average revenue when average revenue is rising as quantity increases.

[4. and 5.] Assume that the government is going to purchase a predetermined quantity of rice for foreign relief and that it is considering making its purchases (a) directly from the growers of rice, or (b) through the regular dealer on the grain exchange. Assume also that there are no other governmental actions affecting rise growing or marketing.

The price to the domestic consumer of rice that remains will be higher in case (a) than in case (b).

The price received by the farmer for the rice that remains will be higher in case (a) than in case (b).

An “inferior” good is one such that a larger quantity is demanded at a high than at a low price.

If the quantity of Y increases and the quantity of X decreases in such a way as to keep total utility constant, then the rate of substitution of Y for X is independent of the quantity of X.

The income of the farmers raising corn increases when the price of corn rises. The rise in income is the “income effect of the rise in price.”

[9., 10., 11.] The Gimcrack Company is a monopoly, selling in two distinct markets. Transportation costs between the two markets can be neglected.

The company will always charge the same price for gimcracks in the two markets.

The company will sell such quantities in the two markets as will make the elasticities of demand the same in the two markets.

The company will sell such quantities in the two markets as will make marginal revenue the same in the two markets.

IV. Consider two alternative taxes imposed on a commodity: (a) a specific tax of T dollars per unit sold: (b) an ad valorem tax of t per cent of the price of the product.

Assume that the commodity is produced and sold under strictly competitive conditions and that the price inclusive of tax when the tax of T is imposed is $P_0$. (i) Prove graphically that an ad valorem tax of $t-T/P_0$ will result in the same equilibrium price. (ii) Suppose a tax rate slightly greater than $t-T/P_0$ is imposed. Under what conditions, if any, is it certain that the revenue will increase? (iii) Decrease?

Assume alternatively that the commodity is produced and sold by a monopoly. Suppose that, when a specific tax of T is imposed, the monopolist chose to sell at a price (inclusive of tax) of $P_1$. Suppose now, an ad valorem tax of $t-T/P_1$ is imposed. (iv) Will the monopolist’s optimum price be $P_1$? If not, will it be higher? or lower? Prove your answer.

PROBLEM

for

ECONOMICS 301

Winter Quarter, 1964

Analyze the business practice discussed in the accompanying excerpt from a Wall Street Journal story of December 4 1963.

Under what circumstances, if any would you expect such a practice to be in the self-interest of the participating companies? How would you suggest testing your explanation?

I. Indicate which alternatives, if any, are correct or fill in the indicated blanks. Where you think it required, briefly justify your answer.

Marginal revenue (a) cannot (b) may (c) must rise as output increases.

A monopolized product initially sells for $1. A tax is imposed on the product. A tax of t cents per unit will reduce marginal revenue at the pre-tax output (a) more, (b) less, (c) the same amount, (d) sometimes more sometimes less than a tax of t per cent.

In the preceding example, the imposition of a tax of t cents will lead the monopolist to reduce output (a) more, (b) less, (c) the same amount, (d) sometimes more sometimes less than a tax of t per cent.

A reduction in demand for a product is followed by a rise in quantity sold despite no change in conditions of supply. It follows that the product is being produced (a) in a competitive industry with increasing returns, (b) in a competitive industry with external diseconomies, (c) by a monopolist, (d) this result is impossible under any of the preceding conditions.

Assume that the government has been supporting the price of wheat by buying any wheat offered to it at its support price. Suppose it abandons the program. In the new position of long period equilibrium the total amount received by producers will rise (a) only if the market demand for wheat is inelastic in the range between the support and new price, (b) only if the market demand for wheat is elastic in this range, (c) whatever the demand elasticity, (d) under no circumstances.

An individual buys four commodities, W, X, Y, and Z, currently spending one-quarter of his income on each. The income elasticity of W and X are 2; of Y, 1. The income elasticity of Z is _________?

Consider three demand curves for commodity X: A, for given money income and other prices; B for given apparent real income in Slutsky's sense; C, for given real income in Hicks' sense. Let all three curves go through the point $(p_o,x_o)$. If X is a superior good, then for a price higher than $p_o$, the quantity demanded will be larger for ____ than for ____ than for ____ (Insert A, B, C, in correct spaces).

Suppose p_o = \2$,$x_o = 40$,thecorrespondingmoneyincomeis$200, and the income elasticity of demand for x is unity. Suppose that at a price of $2.50, the quantity demanded on Curve A is 20. Then the income compensation required to pass from A to B is $ _____ (be sure to indicate sign of change) and the quantity demanded on curve B is _____.

If long run average cost (LRAC) equals short run average cost (SRAC) at an output on the falling segment of the LRAC curve then short run marginal cost (SRMC) (a) exceeds, (b) equals, (c) is less than long run marginal cost (LRMC) at that output.

If LRAC is rising and less than SRAC, then SRMC is (a) rising, (b) falling, (c) greater than SRAC, (d) less than SRAC.

In a discussion of the World Series last fall, Jones offered to take either side of a bet with Smith involving a payment of $2 by one party if the Pirates won, of $1 if the Yankees did. It follows that Jones' estimate of the probability that the Yankees would win is _____ and that his utility function of income is (a) concave upward, (b) linear, (c) concave downward, (d) not concave upward, (e) not concave downward.

Alternatively, Jones refuses to take either side of the preceding bet but offered to take either side of a bet involving a payment of $200 by one party if the Pirates won or of $100 if the Yankees did. This behavior (a) contradicts or (b) is consistent with the expected utility hypothesis.

II. Translate the following quotations into economics and discuss:

"Costs are down partly because contractors expanded their equipment to get ready for the Federal Government's enlarged program. But it was cut back in 1959. … Some contractors needed work to pay for their expensive equipment, and they began making low bids, often at cost, to get the work. They complain bitterly about the price-chopping competition." (Time, Dec. 12, 1960)

"Most foods will be much more abundant and a bit cheaper in 1959 than they were this year [1958]. This optimistic forecast was made by the Agriculture Department which warned, however, that retail price cuts won't be as deep as the prospect of plenty would seem to indicate. Higher marketing and processing costs, officials explained, will partly offset the expected decline in food prices at the farm."

IV. State briefly what seem to you the central features of Chamberlin's analysis of monopolistic competition and Stigler's criticism of the analysis.

Answer the following True, False, or Uncertain. Explain your answer briefly.

If two individuals engage in barter, or direct exchange of goods, then always either: a) One individual benefits by the transaction while the other one is hurt; or b) Both are neither benefited nor hurt.

In a perfect market economy, each consumer participates equally in determining what is produced.

If an increase in the demand for X results in an increase i n the price of X, the demand for X is upward sloping.

If the demand for X has unitary elasticity (η = -1), changes in the price of X will not affect the total expenditures on all other goods.

If one good is inferior, at least one other good purchased by the consumer has to be income-elastic (ηxI> 1).

If the marginal revenue is decreasing with an increase in the quantity X, the demand for X is inelastic.

The substitution effect of a decrease in price, as defined by Slutsky, is positive for a normal good and negative for an inferior good.

If the market for beef is in a stable equilibrium, changes in the supply of beef will have little or no effect on its price.

It is possible for a consumer to buy a fixed positive) quantity of X every month, whatever the price of X may be. (i.e., his demand for X has zero elasticity for all prices).

The demand for agricultural products is inelastic; hence plentiful harvests result in lower incomes for farmers, in a free market economy.

In view of (10), each individual farmer can improve his own position by destroying a part of his production in good years.

A linear and downward-sloping demand curve is always elastic at high prices and inelastic at low prices.

If the Laspeyres quantity index between two periods is 1.10 and the Paasche index is 0.90, the consumers’ taste must have changed,

The cross-elasticity of demand for left shoes with respect to the price of right shoes is zero.

A consumer with a utility function is in equilibrium if the marginal utility of each good is proportional to its price.

If all prices increase by 10%, but money income remains the same, the quantity of each good purchased will decrease.

The demand of a consumer for X cannot be infinitely elastic at every quantity of X, because of the budget constraint.

In an economy where the king distributes all the goods and services as free gifts to the consumers, all the prices are zero. Hence there is no place for price theory in that country.

The demand for X is of unitary elasticity, and 200 similar firms sell X. A reduction of 1% in the price PX charged by one firm will result in doubling that firm’s sales, if other firms sell the same quantity at any price.

Because of transportation costs, prices will differ in different geographical locations, whether or not there exists free competition in the market.

Mark the following True, False, or Uncertain. Explain your answers very briefly.

A monopolist can afford to pay wages below the market wage rates.

A rise in the price of gasoline will lead to a rise in the price of tires.

In a long run competitive equilibrium, the marginal firms produce where marginal costs equal average total costs.

If a firm is in long run equilibrium, it is also in short-run equilibrium, whether it is a competitive or a monopolistic firm.

If a production function is characterized by constant returns to scale, an increase in the use of one factor by 10% will increase output by less than 10%.

A rise in the price of any factor used by the firm (other things unchanged) will always lead to a decrease in production by the firm.

A firm producing the same product in many plants will determine the quantity produced in each plant so that average costs will be equal in all the plants.

If a firm has zero variable costs, then its best profit output is where the elasticity of demand for the product is unitary.

A firm will carry production to the point where the marginal productivities of all variable factors are equal.

In a competitive industry with external economies, the total short run supply curve of the industry shifts to the left when there is a permanent decrease in demand for the product.

A monopolist is faced with the following stable demand schedule for his patented machines:

Price per machine (thousand dollars) / Quantity per month / TR / MR / TC / MC 40 / 1 35 / 2 30 / 3 25 / 4 20 / 5 15 / 6 10 / 8 5 / 10

The Costs of production are $5000 per machine, and the fixed costs are $16000 per month.

1.) Compute total and marginal revenue and total and marginal costs in the table above.

2.) Find the equilibrium price, quantity and profits of this firm.

3.) A tax of $60,000 per month is imposed on the firm. Find the new price, quantity and profits.

4.) Instead, a tax of 60% of the market price is imposed on the machines. What will be the monopolist price, output, profits? The tax revenues?

5.) Alternatively, a tax of $24000 per machine is levied. What are the equilibrium price, quantity, profits and tax revenues? What will be the long-run equilibrium quantity?

6.) If no tax is imposed, but a maximum price of $10,000 is enforced, what will be the quantity sold? The Profits?

7.) State your preference among the 5 alternatives ((2) – (6)) above, and justify your choice briefly.

Derive the expression for the elasticity of demand facing a particular producer in terms of the elasticity of “total demand” in the market and of the elasticity of “other supply”.

Outline the economics of the fishing industry. What resemblance, if any, do you see between the economics of the fishing industry under conditions of competition and the economics of monopolistic competition.

By means of appropriate diagrams and/or explanations, show the short-run effect of each of the following taxes on the output and profits of a monopolist.

An excise tax of 10 cents per unit of product.

An excise tax of 10 percent of the price of the product.

A corporate profit tax equal to 50 percent of net profits.

The Edgeworth Box Company is the only employer in the town of Yarmouth. Its supply schedule of labor is given by $W=40+\frac{1}{4}q$, where $W$ is the wage in cents per hour and $q$ is the number of manhours supplied per week. The company sells boxes in a competitive market. The value of the marginal product of labor is given by

$V=100-\frac{1}{2}q$ for values of $q$ greater than zero.

How many man-hours of labor will the company employ, and at what wage?

Show diagramatically for part (a) first, the wage bill and second, the sum of monopoly profits and the return to factors of production other than labor.

What will be the effect on employment of a legal minimum wage of 60 cents an hour? of 80 cents an hour?

This problem may be solved algebraically or graphically. The following table gives numerically some points on the schedules whose equations are given above:

Supply [q (Man-hours), W (cents)] / Marginal Product [q (man-hours), W (cents)]: 1, 40.25 / 1, 99.5 2, 40.50 / 2, 99.0 3, 40.75 / 3, 98.5 4, 41.00 / 4, 98.0 etc. / etc.

A recent survey found that supermarkets in low income areas charge higher average prices than supermarkets in high income areas for many identical items. This is consistent with

(a) price discrimination in the sale of groceries

(b) no price discrimination

(c) lack of competition in the retail grocery market

(d) competition in the retail grocery market.

Check those that apply.

What effect would you expect the British devaluation of the pound from $2.80 to $2.40 to have had on the dollar price of Rolls Royce cars? Justify your conclusion, preferably by diagrams describing the position of the company, indicating explicitly any assumptions you regard as relevant. Assume that wage rates in Britain in pounds are not affected by the devaluation.

Discuss the probable shape of the long-run cost curve for an industry operating under approximately perfect competition. How would it differ in the short run, i.e., in response to an unanticipated shift in the demand-curve for the product, assumed not to be permanent?

In the 1880’s there were a class of independent railroad ticket brokers called “scalpers,” who purchased tickets in quantity at reduced prices from the railroads and resold them to the public, typically at prices below the prices posted by the railroads and charged to people who bought tickets at the railroad windows.

In discussing the practice in its 1890 report, the Interstate Commerce Commission argues that (a) it raised the cost of transportation because it made it necessary, “to support the auxiliary force of scalpers,” and (b) also reflected “the avidity of nearly every railroad to do a greater amount of passenger business than any competitor.”

Is (a) correct? Is it consistent with (b)?

President Johnson has recently sent to Congress a bill that would require certain industries to pay double the standard wage-rate for overtime. Assuming competitive conditions, what can you say about the effect on (a) prices of products (b) output (c) number of man hours, (d) number of persons employed in (1) the industries affected and (2) other industries?

Sales of some firms are occurring at prices below average variable cost. Suppose there were no legal restrictions on merger. Under what conditions, if any, would the firms in the industry prefer merger as a means of reducing industry output?

A recent treatise on antitrust law lists the following as among the factors favorable to collusion in an industry.

No fringe of small buyers.

Inelastic demand at competitive price.

Entry takes a long time.

Many customers.

A standardized product.

High ratio of fixed to variable costs.

Discuss for each factor the effect, if any, it has on probability of collusion.

What problems for profit maximizing collusion among the firms in the book publishing industry would arise because of each of the following conditions:

There are two classes of books, fiction and nonfiction. Publishers generally publish both types although some publishers specialize in nonfiction.

Sales and profits from n fictional books behave like n independent random variables drawn from the same distribution. Sales of a given fictional book in a given year are independent of the sales in the previous year. There is a positive probability of sales coming to a halt in a given year and remaining zero thereafter.

Nonfiction is of two types, textbooks and “how-to-do-it” books. The expected number of years of positive sales for a nonfiction book is greater than for a fiction book.

Retail outlets and mail order sales are the only channels of distribution to the final users of books.

The cost function of a book publisher is proportional to the number of titles and the quantity printed of each title.

Every title has the protection of a copyright. Assume that the Xerox machine and similar devices do not exist.

Anyone can arrange to have a book printed by a printing company and can arrange for its distribution.

How do you explain the following empirical findings for manufacturing industries?

Let

$N_{it}$ = number of companies in the 4-digit industry $i$ in year $t$

$C_{it}$ = 4-firm concentration ratio, industry $i$, year $t$.

$Q_{it}$ = index of real output industry $i$, year $t$

$R_{it}$ = measured rate of return of all firms in industry $i$, year $t$.

For each $t$, holing log $N_{it}$ constant, $R_{it}$ is an increasing function of $C_{it}$.

For each $t$, holding $C_{it}$ constant, $R_{it}$ is an increasing function of log $N_{it}$.

For each $t$, $C_{it}$ and log $N_{it}$ are negatively correlated.

Between 1947 and 1967 the correlation between the change in $C_{it}$ and the change in log $N_{it}$ is 0.55.

Between 1947 and 1967 the correlation between the change in $C_{it}$ and the change in log $N_{it}$ is zero. The correlation is also zero between the change in log $Q_{it}$ and the change in $C_{it}$.

Comment briefly on each of the following passages (explanation, justification, disproof, qualification, as may be appropriate).

“It is not the case that an increased demand for mutton must in the long run necessarily operate to lower the price of wool. An increased demand for mutton will stimulate sheep farming, but it will also stimulate the substitution of crossbred [mutton type] for merino [wool type] breeds; and the resultant of these two opposite tendencies is logically indeterminate.”

“When Consols are at 93½ , and business in in a tranquil state, it matters not how many buyers of these securities there are at 93, or sellers at 94. They are really off the market. Those only are operative who may be made to buy or sell by a rise or a fall of an eighth. The question is, whether the price shall remain at 93½, or rise to 93 5/8, or fall to 93 3/8. This is determined by a very few persons and by the sale or purchase of very small amounts.”

“The degree of monopoly control by a seller equals the degree by which price exceeds marginal revenue.”

“The degree of monopoly control by an employer as employer equals the degree by which the value of the marginal product of labor exceeds the marginal supply price of labor.”

“Where it is the case that people would not give as large a total sum for a larger quantity of an article than for a smaller, this would be expressed geometrically by saying that the demand curve would cut negatively a rectangular hyperbola.” [negatively means cut from above]

“The fact that supplying labor with better or more instruments results in an increase in output has sometimes led to the conclusion that capital is productive, a phrase which must be used with care. The strictly accurate statement is that labor applied in some ways is more productive than labor applied in other ways. Tools and machinery, buildings and materials, are themselves made by labor, and represent an intermediate stage in the application of labor. Capital as such is not an independent factor in production, and there is no separate productiveness of capital.”

On what grounds can it be held that in any important industry, increase in output is in the static long-run likely to be subject to conditions of increasing cost? Give and discuss the arguments which have been presented in support of different views.

Suppose that a single monopolist takes charge of an industry which has hitherto been in the hands of a large number of independent producers and which makes extensive use of a specialized type of labor. Give an account of the factors which will determine the effect of the change on (a) the industry’s output, and (b) the volume of employment of labor by the industry.

A power monopoly, operating within the range where there are net internal economies of large-scale production sells current for both industrial and domestic use. The distribution costs on the latter are 20 cents per unit higher than for the former. Given: (a) the industrial demand schedule for current; (b) the domestic demand schedule for current; (c) the average cost schedule for generating current plus distributing it to industrial users.

What rates should be charged to each type of customer to maximize the net income of the company?

a. What conditions are necessary if the demand curves for particular firms in an industry are to have negative inclinations, but without any net monopoly profits?

b. Are these conditions compatible with long-run equilibrium?

The competitive firm attempts to equalize price, marginal cost and average cost.

A subsidy of a fixed number of dollars per unit of output might be used as part of a program to control a monopoly in the public interest.

The supply curve for the output of a monopolist is inelastic at the point of maximum monopoly profit.

II. (60 points)

The competitive private enterprise form of economic organization is regarded by many economists as a sort of ideal which it would be desirable to approximate in practice.

(a) On a purely theoretical level, use the tools of economic analysis to explain to a skeptic precisely in what way(s) and why the competitive private enterprise form is so good. State whatever assumptions and define whatever terms you require, and state explicitly the criteria of excellence that you are using.

(b) Assume an economy that is perfectly competitive. What important economic problems, if any, may still be unsolved despite the fact that perfect competition has been achieved? Explain in each case why the problem is important and why perfect competition does not solve it, or explain why there are no unsolved problems.

III. (40 points)

Some prominent manufacturers such as Sunbeam, Eastman Kodak, and Bayer Aspirin, set minimum prices below which retailers may not resell their products. In most states an agreement to this effect between a manufacturer and some retailers is legally enforceable on all retailers.

(a) What is the probable effect of this practice on the net rate of return on factors of production used in retailing?

(b) What is the probable effect of this practice on the net profits of the manufacturers concerned?

Explain your answers fully.

What theories do you offer to explain the following phenomena?

(a) During a prolonged rise in the general level of prices, the price of soft drinks remained at five cents with no change whatsoever in the physical characteristics of the product.

(b) During a prolonged rise in the general level of prices the price of candy bars remained at five cents, at the same time, however, as the size of the bars decreased.

Using diagrams, briefly discuss the long-run cost curve for a competitive industry. Indicate, with diagrams, the response to be expected from (a) an expansion of demand, (b) a decrease of demand, within periods too short for a significant change in the fixed investment.

Develop the major aspects of the theory of a competitive firm, and compare it with the theory of consumer behavior. What are the similarities and the differences between the two theories and the concepts used in each?

(1 hour) Answer each question “true” or “false” and explain your answer very briefly.

It is a tautology that the average costs of all firms are equal in equilibrium in a competitive industry.

A cartel which allows its members to buy and sell output quotas will have a larger net profit for all firms combined than one which does not.

Since all firms in a competitive industry have the same marginal costs, it is meaningless to speak of more and less efficient firms.

A fall in the price of houses will increase the sales of doorbells; a fall in the price of doorbells will not increase the sales of houses; therefore Slutsky’s equation is wrong.

The average size of farm has risen in recent decades in the United States and Canada. This shows that the farm enterprise is typically subject to increasing returns to scale.

A specialized machine has a life of 5 years. Total returns to it in periods of less than 5 years are quasi-rents.

Assume that the world demand elasticity for tin is -2, and that Bolivia produces 1/3 of the world’s tin. Therefore, the elasticity of demand for Bolivia tin is at most -6. 0.

If factors of production are used in absolutely fixed proportion in the production of a particular product, the demand for each of the factors by the producers of the product will be completely inelastic with respect to price.

A supply curve is a curve displaying the quantities which will be supplied at all possible prices. It follows that there is no supply curve under monopoly.

If a firm is operating in the region of falling marginal costs, it must be making losses because marginal cost is then less than average cost.

III. (40 minutes)

It has often been suggested that the demand for a durable good could be increased if “something were done about the large number of used items on the market” The practical suggestions usually are (1) a government regulation forbidding the use of items older than some specified age, e.g. declaring all pre-1950 cars as “unsafe” and withholding license plates from them or (2) “the manufacturers should buy up the used items and destroy them or export them at a loss. Discuss the consequences of these two types of policies on (a) the demand for new durable equipment and (b) the profitability to the industry of the two policies.

IV. (40 minutes)

“The first impact of this policy (tight money) is the higher interest rate. Plainly the impact of this will be very different on a firm that has control over its prices and hence can pass along this higher cost as compared with the firm whose prices are given and which, accordingly, must bear the cost itself. The point need not be labored.

“The U.S. Steel Corporation justified its price increase of 2 weeks ago by the contention that its cost had risen. In doing so it not only conceded its ability to pass higher costs, including higher interest charges, to the consumer but based its policy on the need to do so. But no such opportunity is open to the farmer or to the smaller businessman. They cannot raise their prices, for they are market-determined. They shoulder themselves the costs of this policy.”

Analyze and evaluate this statement. Disregard the peculiar problems of monetary policy. Treat it as a question about the differential impact of a change in any factor price on a competitive firm or industry as against the impact on a monopolistic firm. Does a change in factor cost “hurt” less in one case than in the other? What do you understand by “passing the cost on to the consumer” and how does the distinction between a monopoly and a competitive industry affect this? Assume the same cost curves and the same shifts in both cases.

(60 points) Indicate whether you believe each of the following statements to be true, false, or uncertain. In each case write a few sentences explaining your answer. Your grade will depend heavily on your explanation.

If the rate of obsolescence is constant over time for each type of capital equipment, a rise in the rate of interest will shorten the optimal life of capital equipment.

If oranges are substitutes for apples, apples are complementary to cheese, and cheese is a substitute for butter, oranges and butter are complements.

If a certain commodity is rationed and subject to price control, and there is a black market price for it, the black market price is the equilibrium price of the commodity in the absence of price control.

Let ${\sum }_i{p}_{i1}{x}_{i1}$ and ${\sum }_i{p}_{i2}{x}_{i2}$ be the expenditure of a firm on factors of production per unit of output at two points in time. If ${\sum }_i{p}_{i1}{x}_{i2}>{\sum }_i{p}_{i1}{x}_{i1}$ and ${\sum }_i{p}_{i2}{x}_{i1}<{\sum }_i{p}_{i2}{x}_{i2}$, the production function of the firm has changed between the two points of time.

A company cannot have a monopoly if its shareholders receive only the normal rate of earnings on their stock in it.

If the production function of an Industry is subject to constant returns to scale, the industry supply curve will be horizontal.

If it were possible to travel backwards as well as forwards in time, everyone would be a millionaire.

The development of better fertilizer will increase the value of farm land.

Manufacturers frequently advertise that their products contain extra ingredients, and they generally succeed in selling “extra-ingredient” products (e.g. Bufferin) at higher prices than “similar” single-ingredient products (e.g. aspirin). This implies that consumers have a diminishing marginal rate of substitution between the ingredients.

The removal of a barrier to competition anywhere in the economy must make society better off.

Given:

a three-product world,

the cross-elasticity of demand of x with respect to the price of z is zero,

the own-price elasticity of demand for x is -1,

y and z are substitutes,

expenditures on X occupy half of consumers’ budgets, expenditures on Y one quarter of consumers’ budgets in the initial situation,

it follows that the own-price elasticity of demand for y is greater than 1.5 in absolute value. (For this question consider all price-elasticities defined to include the substitution effect only.)

The price-elasticity of demand on the part of a competitive industry for a factor of production will be greater, the smaller is the share of that factor of production in the total costs of the industry in question.

If production in industry X (assumed to be competitive) is governed by a Cobb-Douglas production function, then no wage set by the trade union in that industry will produce greater total labor income than any other wage.

A tax of a fixed amount per unit of output, placed upon the product of an industry with constant costs, will necessarily result in a smaller rise in price if that industry is organized (and behaves) as a monopoly than if the industry is competitive.

In an industry employing just two factors of production, the elasticity of demand on the part of that industry for either factor must be less in absolute value than the elasticity of substitution between the two factors in that industry.

(15 points) The University City Art Theater, a motion picture house showing foreign films, has the following price policies: The basic admission price is $1.00 for evening performances and 60 cents in the afternoon. Registered university students are admitted at half price at all times. A member of the University’s economics department has complained that the theater is a discriminating monopolist and should be required by local ordinance to follow a one-price policy. Comment on the desirability of this recommendation.

(25 points)

Industry X is composed of 10 firms, and organized as a cartel. The pricing policy of the cartel is determined by the following rule: each firm will produce one-tenth of the output of the whole industry, and the price set for the final product will be just equal to the marginal cost of production in the firm with the highest marginal cost. Show how you would measure the welfare cost of this arrangement, as compared with a competitive equilibrium.

The firms now merge into a single monopoly firm, the previous 10 firms now becoming 10 divisions of the new company. All ten divisions continue to operate and have the same marginal cost functions as they did when operating separately. Show how you would measure the welfare costs of this new arrangement. Under what circumstances, if any, would these welfare costs be lower than those of case A?

The government now intervenes to break up the monopoly. The same 10 firms as existed in case A are reconstituted; collusion is somehow prevented; and merger is precluded by a requirement that no firm shall expand the total volume of its capital. Assume that the firms begin operating under this new arrangement with each of them having the amount of capital resulting from a long-run equilibrium under case B, and that the firms behave competitively. How would you measure the welfare costs of this arrangement? Under what circumstances, if any, would these welfare costs exceed those measured under case B?

Discuss the relationship of marginal cost to prices:

under short-run competitive equilibrium;

under long-run competitive equilibrium

when (1) the industry is subject to external diseconomies of large production; (2) the industry operates under conditions of constant cost.

Define briefly the following terms:

Marginal revenue

Fixed cost

Income elasticity

Profit

Production function

Diminishing returns

Inferior good

Luxury

Discuss the following quotations:

(from a newspaper story) “The Sun Rose Bar and Grill…advertised ‘the largest glass of beer in the city for five cents’ and did a tremendous business in eight-ounce glasses of beer as soon as the public realized it was no April Fool proposition…

‘If enough of us do this’ said…one of the proprietors, ‘the brewers will have to cut prices!’”.

(from a newspaper story) “Domestic producers of oil contend that unrestricted imports hurt them not only because they swell the supply, but because a barrel of foreign crude costs about $1 less than a comparable barrel of U.S. crude.”

“All of this is to say, of course, that in practice what we have to reckon with is not a unique marginal cost for a given level of output, but a complex of marginal costs, each of which is pertinent to a particular period of time. As a longer period of time is considered, more of the ‘fixed factors’ become variable. Because of this greater flexibility in the production process, long-run marginal cost will generally be less than short-run marginal costs.” A. Bergson in A Survey of Contemporary Economics.

Indicate whether statement is true, false, or uncertain, and briefly give your reason.

A firm has a monopoly in its home market and also sells in a perfectly competitive world market; if its home-market price is 50% above the world market price, the elasticity of demand in the home market must be 3.

If a multiplant firm has to produce a given quantity of output, it will never pay it to produce in more than one of its plants if that plant has decreasing marginal costs.

The development of more rapid urban transport will inevitably raise the aggregate rental value of urban residential property.

If the number of acceptable applicants for admission to medical schools is less than the number that could be accepted, the medical profession cannot be raising its earnings by artificially restricting entry.

The rate of interest is determined by the marginal productivity of capital.

If a particular commodity is subject to a special tax not imposed on other commodities, removal of that tax will always increase economic welfare.

If the supply curve of a competitive industry has a positive slope, it means that the industry is subject to decreasing returns to scale.

If wage rates, on the average, increase at the same rate as average product per worker, this means that the marginal return on investment declines over time.

Entrepreneurs in a competitive industry may realize short term gains or profit as a result of an increase in the price of an input (due to a shift in the supply function for the input), even if the demand curve for the industry remains unchanged.

A. A drug manufacturer stated that the prices of drugs sold in England were priced at about one half the price of similar drugs in the United States. The reason given for the price difference was that per capita incomes were much lower in England than in the United States and the English could not afford to pay as much for the drugs.

Accept the factual statements as valid. Discuss the statement in terms of:

Demand functions for drugs in the two countries (income and price elasticities).

Whether the manufacturer could be maximizing his profits.

International trade restrictions on drugs in the two countries.

B. In a given competitive industry, both price and output increase between two time periods. Indicate why each of the following statements is consistent or inconsistent with the observed changes in price and output or is simply irrelevant:

The industry has a perfectly elastic supply curve.

The demand curve has shifted to the right.

The factor supply curves are upward sloping.

The industry is subject to diminishing returns.

Total revenue has increased because the price elasticity of demand is greater than unity.

Rents and quasi-rents have increased.

A. In the effect of union-produced wage increases on prices, one economist says,

“A competitive industry (with a horizontal long run supply curve] will eventually pass all of a wage increase on to consumers in higher product prices” but “a monopolized industry, if it maximizes profits both before and after the wage increase, will not pass on the full amount of the wage increase in prices.”

Assume that the monopolized industry, like the competitive, operates under long-run constant costs.

Explain precisely what “pass all of a wage increase on to consumers in higher prices” means.

Is the statement for the monopolized industry correct? If so, prove it. If not, state why not and indicate any additional conditions required to make it true.

B. This economist also says that the competitive industry “will regain its normal rate of profit”, whereas, in the monopolized industry, “the wage increase will lower monopoly profits”

What does the word “profit” mean in these statements? in the phrase “maximizes profits” of the preceding question?

Do the two statements imply a difference in results in the sense that the monopolized industry will not regain “its normal rate of profit”?

Indicate briefly what other meaning or meanings, if any, does the term “profit” have in economic theory.

(60 minutes) True-False. State very briefly the reason for your answer to each question.

The cross-elasticity of demand of left shoes with respect to the price of right shoes is zero.

A competitive firm buying electrical equipment was not injured by the collusion of the producers (General Electric case) even if the collusion raised prices above the competitive level.

If a consumer’s income rises in the same proportion as a Laspeyres index of his cost of living, his real income is rising.

Duopolists with different costs cannot achieve a monopoly price without transfer payments between the firms.

The marginal utility of income is not constant for a worker who increases his hours of work when the wage rate rises.

If two goods are substitutes in consumption, a 10 cent fall in the price of either good will lead to the same increase in the consumption of the other good.

A minimum wage law may increase the demand for labor by some firms.

A competitive firm will have a more elastic demand function for a factor of production than a monopsonist.

If a firm is operating in the region of falling marginal costs it must be making losses, since marginal cost is then less than average cost.

A multiplant firm will schedule its output so that marginal costs are equal in all plants.

(20 minutes) Each firm in an industry is given a license to operate, and no new firms are allowed to enter. The value of a license rises over time — does this prove that firms operate subject to diseconomies of scale?

Indicate whether you believe each of the following statements to be true, false, or uncertain. In each case write a few sentences explaining your answer. Your grade will depend heavily on your explanation.

A monopolist can always get more revenue from a consumer by a fixed sum plus price-per-unit system of charging than by the price-per-unit alone.

If a cartel assigns quotas to its member firms on the basis of their “capacity” there will be more than the profit-maximizing amount of investment in the industry.

The assumptions of competition, constant returns to scale, and equilibrium are inconsistent.

In equilibrium, a competitive firm has all the business (sales) it wants. Hence advertising is incompatible with either competition or equilibrium.

The competitive private enterprise form of economic organization is regarded by some economists as a sort of ideal which it would be desirable to approximate in practice.

On a purely theoretical level, use the tools of economic analysis to explain to a skeptic precisely in what way(s) and why the competitive private enterprise form is optimal. State whatever assumptions and define whatever terms you require, and state explicitly the criteria of excellence that you are using.

Are there any conditions under which the competitive organization form may fail to produce the results promised above?

What other important economic problems of a modern state, if any, may still be unsolved despite the fact that perfect competition has been achieved? Explain in each case why the problem is important and why perfect competition does not solve it, or explain why there are no unsolved problems.

(20 points) Define briefly:

Indifference curve

Income effect of a change in price

Equilibrium price

Marshallian demand curve

Marginal rate of substitution

(40 points) Indicate whether each of the following statements is true (T), false (F), or uncertain (U), and state briefly the reason for your answer.

A government subsidy of $100 per year to each grower of potatoes enacted after the end of a particular planting season and expected to be continued indefinitely will lower the price of potatoes (which it is assumed cannot be stored)

_____ a. for that season's crop.

_____ b. in the long run.

During period when general business is improving, both the price and output of steel rise. This means

_____ a. that the income effect of the rise in price is greater than the substitution effect.

_____ b. that the demand for steel is inelastic.

_____ c. that the demand for steel increases with income.

Removal of rent control would

_____ a. reduce the money wages of maids.

_____ b. reduce the price of trailers.

_____ If the removal of rent controls were to lead to a rise in rents, then the total amount paid in rents would decline if the demand for rental housing were elastic and rise if the demand for rental housing were inelastic.

_____ "Since elasticity measures variation in quantity (demanded or offered) divided by variations in a price, the elasticity of demand for anything will be seven times as large for seven similar demanders as it is for one." (A. C. Pigou)

_____ A rise in the price of coal will reduce the number of "Okies" trying to go to California.

(40 points) Assume that a system of point rationing is superimposed on a price system. Each consumer is given a specified total number of points, point prices are set on various commodities, and a consumer must pay over both points and money to purchase a commodity. For simplicity, assume that there are only two commodities in the system. Indicate (on an indifference diagram or in any other manner), how to determine the quantity of each of the two commodities an individual would purchase, given money prices, point prices, his money income, and his point income.

(a) If it is illegal to transfer points from one person to another and consumers conform to this requirement. In your explanation, distinguish among the various special cases that may arise.

(b) If points may legally be bought and sold for money. In this case, take as given also the price of points in terms of money.

(c) Suppose that a fixed total quantity of each of the two goods is available; that point prices are fixed by the government, money prices are freely determined so as to clear the market; and that in case (a) some consumers are left with points which they cannot spend because they do not have enough money. The legal prohibition against transferring points is now removed, the point prices and the total number of points issued are unchanged, and the price of points in terms of money is determined in the open market. What, if anything, can be said about the price of points in terms of money under these conditions?

Indicate briefly whether the following statements are correct or incorrect and why.

Economic theorists contend that, under competition, wages are always equal to the marginal product of labor. It seems to follow that if they are right, the simplest way to raise the productivity of labor, and hence to increase the total output of society, is to force employers to pay higher wages.

The value of the marginal product of a laborer employed at the same wage rate is higher if he is employed by a monopolistic firm than if he is employed by a competitive firm. It follows that the monopoly employs labor more efficiently.

A rise in wages will tend to lower the marginal productivity of capital.

The law of diminishing returns is contradicted by the fact that agricultural output of this country has increased tremendously despite a decrease in the proportion of the working population on farms.

Discuss the conditions that may give rise to long-run decreasing cost for an industry. What are the implications of the various conditions for the state of competition in this industry.

Suppose the wage differential between northern and southern laborers of the same grade were eliminated by raising the southern wage rates. Discuss the short- and long-run economic effects, including the effects on employment in the north and south.

A particular industry composed of numerous competing firms each producing a single product has been hiring labor by the hour and is in a position of long-run equilibrium. This industry (and no other) is required, because of a new law, to hire the labor by the year at a guaranteed annual wage equal to the hourly wage prevailing prior to the change times the number of hours in a normal working year. Discuss (1) the short-run effect of this change on (a) the average and marginal cost curve of a typical firm, (b) the output of that firm, (c) the number of man hours of labor employed by that firm; (2) the long-run effects on the number of firms in the industry and the output of the industry.

2. Indicate which of the following statements are true (T) and which false (F):

[T] If a one per cent increase in price will cause more than a one per cent reduction in amount demanded, the demand for the commodity is elastic.

[F] Cost of production affects price only through its effect on the rate of production.

[F] If production of a commodity is completely monopolized, and if the monopolist takes full advantage of his position, no changes in the cost of production will have any effect upon price.

[F] A fixed tax (say, a license tax of $10,000) would operate to increase the price at which a monopolist would make the largest net return (or largest net earnings).

[blank] An individual firm will undertake to equalize marginal revenue and marginal cost.

[F] An excise tax is likely to increase the price of a competitively produced commodity by the full amount of the tax.

[T] If price exceeds the competitive producer’s average expense it will therefore be advantageous for him to increase his rate of production.

[T] A monopoly will never operate at a price at which the demand of its product is inelastic.

1. Define briefly the following terms:

a. Income elasticity of demand

b. Demand curve for the product of an individual firm

c. Supply curve

d. Marginal revenue

e. Cross elasticity of demand

f. Oligopoly

6. Assume a change in the laws so that less stringent conditions are imposed for bankruptcy and reorganization in a particular field (say the production of steel). As a consequence, a number of steel firms reorganize, wiping out a large part of their bonded debt. What would you expect to be the short- and long-run effects of these events on (a) the output and prices of the reorganized firms; (b) the amount of investment in the industry; (c) the rate of interest paid by the industry for new loans; (d) the output and prices of the industry? In each case, give the basis for your answer.

Answer each of the following “true,” “false,” or “uncertain” and explain your answer briefly. Your score will depend heavily on your explanation.

If two linear demand curves have the same slope at the same price, then at that price the one for which quantity is largest is least elastic.

An important difference between an indifference map and an isoquant map is that indifference curves never cross.

An important difference between the utility functions depicted by usual indifference maps and production functions is that distances in utility space can be ordered but not measured.

The following conditions are necessary and sufficient for the short-run maximization of monopoly profits: (a) Marginal revenue is equal to marginal cost; (b) price is greater than average variable cost.

An increase in fixed cost caused by an increase in the rate of interest on long run term debt will increase long-run marginal cost but not short-run marginal cost.

An effective legal minimum wage above the prevailing wage will increase the employment of a firm that is a monopsonist in the labor market.

The costs of owner-operated businesses are generally understated because the owners do not pay themselves wages. If they did, the accounting costs would be equal to the economic costs.

The way to produce a given output in the long run at lowest cost is to construct the plant whose short-run average costs are at a minimum at that output.

If a monopolist maximizes profit in the short-run and operates where total revenue is at a maximum, he has no variable costs.

A production function shows constant returns to scale if an increase of 10 per cent in the input of one factor will increase output by 10 per cent.

The New York, Ridgewood, and Exurban Railroad operates a commuter passenger service. Two kinds of reduced fares are offered: (1) children under 12 years of age ride at half-fare at all times. (b) on Wednesdays there are special half-fare tickets for adults good on trains leaving after 10:00 a.m. and returning before 4:30 p.m. The railroad has been accused by the New Jersey Commerce Commission of being a discriminating monopolist. Can you defend it against this charge with respect to either or both of its half-fare arrangements? If it is in fact a discriminating monopolist with respect to either arrangement, is it promoting an inefficient use of resources by its pricing practices?

(a) Draw the short-run cost curves, demand curve, and marginal revenue curve of a monopolist who is suffering a short-run loss and is minimizing this loss. Indicate the amount of the loss on your diagram. (b) Show the same situation by means of short-run total cost and total revenue curves.

Beef sold in rural New England is mostly purchased from Chicago. Yet it is said that the retail price of the better cuts of beef is substantially less than in Chicago for the same grade of meat. Assuming that this is in fact the case. How would you explain this phenomenon in strictly economic terms? (I.e., do not give the easy – and probably wrong – explanation of irrationality, gouging, or the like). How would you test the validity of your suggested explanation?

Indicate whether each of the following statements is TRUE, FALSE, or UNCERTAIN. In each case write a few sentences explaining your answer. Your grade will be determined by your explanation.

It is immediately obvious that if the firm has any significant degree of monopoly power, sales maximization would be better for the rest of the economy than profit maximization.

When a firm increases its price because its raw material costs have risen, the buyers accept the price increase more readily.

If A and B are produced in fixed proportions and consumed in fixed proportions, one of the two will be free.

Marshall asserts that the rents of different qualities of agricultural land will approach equality as the economy grows in population and wealth.

An industry whose output is increasing cannot be making negative profits.

The prohibition on environmental pollution by (say) a factory cannot increase national income.

A competitive industry is more likely to cartelize when the probability of expropriation increases.

Regulation of a competitive industry by the government will decrease the probability of cartelization.

In the social security systems of most countries, the age of retirement after which old age pensions are “payable” is lower for women than for men (usually 60 as compared with 65 years of age), even though on the average women live significantly longer than men. This is a clear case of discrimination against men, which should be protested by the Men’s Liberation Movement.

The U.S. personal income tax system allows married couples to “split” their aggregate income equally and pay tax on the results at the same rates as single people would. This is a clear case of discrimination in favor of heterosexuality that should be vigorously protested by the Gay Liberation front.

If the elasticity of supply is less than unity, and the elasticity of substitution in production greater than unity, a fall in the price of a factor must increase the demand for it.

Labor can be “Exploited” only if there is monopoly in the product market.

In most states it is illegal for drug stores to advertise the prices of prescription drugs. A customer can find out the price of a prescription drug only by asking the pharmacist in person. In addition only pharmacists licensed by the state are allowed to dispense drugs and every drug store must employ at least one licensed pharmacist. One can become a licensed pharmacist by passing an examination administered by the state and written by a board of pharmacists. Finally, a pharmacist must fill a prescription exactly as it is written by the physician and may not substitute a generically equivalent drug.

What would happen if pharmacists were allowed to advertise the prices of prescription drugs?

What would happen to the price of drugs if pharmacists were allowed to substitute any drug from a specified list in place of the prescribed drug?

We are presently importing considerable oil at the $10 barrel price, and producing domestically at a free price from new wells and a $5 price from “old” wells (on amounts they produced before the oil price rises).

What would be the effect on domestic price of a higher tariff on imports? On what would the magnitude of the price rise depend?

What would be the effect on domestic price of a removal of the price ceiling on “old” oil? On what would the magnitude of this price effect depend?

Translate into the apparatus of indifference curves and budget lines the following phenomena:

The individual likes good music more, the more he hears.

The individual has monopsonistic power with respect to one commodity.

(a) The consumption of the two commodities (however spaced) is poisonous.

(b) The consumption of either commodity alone is poisonous.

The individual cannot afford one of the commodities.

(a) One of the commodities yields increasing marginal utility.

(b) Both do.

Assume there is an exhaustible resource that can be extracted at a constant marginal cost c. Assume there is a competitive industry that extracts this resource. Derive the behavior of the equilibrium price over time if the demand schedule for the product remains constant over time.

Under the same demand and cost conditions, derive the equilibrium price if the resource is controlled by a single firm.

In an anti-trust case against the Aluminum Company of America, Judge Learned Hand argued that the Aluminum Company could be regarded as having essentially a complete monopoly on aluminum despite the existence of a highly competitive market in secondary or reclaimed aluminum (made from scrap) accounting for about one-third of the total aluminum used for fabrication. He justified this conclusion on the grounds that all secondary aluminum derives ultimately from primary aluminum produced earlier and hence that the Aluminum Company through its control of the output of primary aluminum indirectly controlled the quantity of scrap available.

Evaluate the economic validity of this argument. To simplify your analysis assume that a single firm, say the Aluminum Company of America, has a complete monopoly of primary aluminum; that aluminum for fabrication comes from primary aluminum and secondary aluminum; and that primary and secondary aluminum are perfect substitutes. Indicate in detail how to determine the optimum price for the Aluminum Company to charge and the optimum output for it to produce if (a) the secondary aluminum is refined and sold by a large number of firms under competitive conditions; (b) it has a complete monopoly of secondary aluminum as well.

Hand's conclusion presumably is that the price of aluminum would be the same in cases (a) and (b). Is he correct? If not, would it be higher in case (b) than in case (a)? Lower?

It is widely argued that entrepreneurs engaged in a number of different activities somehow have a “competitive advantage” over entrepreneurs engaged only in one even if no technical economies are achieved by combining the activities. This general argument and the supposed advantage take many different forms: sometimes it is that one activity provides a “guaranteed” market for another activity; sometimes that one activity provides financing or capital for another; sometimes that a monopoly in one line confers an advantage in another. A recent example of this reasoning is contained in a report by The Chicago Daily news financial columnist on November 20, 1951 that Sears-Roebuck had completed an arrangement with Kaiser-Frazer to market an automobile under the name of “Allstate.” The columnist commented “also there is the Allstate Insurance Company, a wholly owned subsidiary, which would benefit heavily through liability and other policies written in connection with the sales of an Allstate automobile….Some of the gossip around Detroit has been to the effect that the Allstate would have Sears batteries and tires and certain other Sears accessories as original equipment—which would mean more business for these departments of the company.”

(a) The key question is, of course, whether the financial incentive to Sears to market an automobile is greater because it owns the subsidiary companies than it would be if it did not own them. You will find it helpful in answering this question to consider first two intermediate questions: (b) Given that Sears does own the subsidiary companies and that it is going to market an automobile under its name, is it in its own interests to require that the car be equipped with accessories produced by its companies? (c) To require that cars it sells be insured by its own insurance company?

In answering both questions (a) and (b), consider separately two cases: (1) The subsidiary companies can be regarded as operating under highly competitive conditions; (2) the subsidiary companies can be regarded as having a monopoly of the products they produce. Do the conclusions depend on the assumption made about competitive conditions? Assume throughout that there are no “technical” economies from combining the various activities.

“Monopolistic competition robs the old concept of industry (and also the Chamberlinian group) of any theoretical significance…The value of these groupings is only a concrete, empirical one…Which firms shall be included in any one group will have to be decided, not on an a prioribasis, but after an empirical survey of market realities…In the general pure theory of value, the group and the industry are useless concepts…When the study of competition is freed from the narrowing assumptions of pure competition, only two terms remain essential for the analysis: the individual firms, on the one hand; the whole collectivity of competitors on the other.” (Triffin)

(a) Explain why “monopolistic competition robs the old concept of industry…of any theoretical significance.”

(b) Explain the general position summarized in this quotation and discuss it critically.

Indicate whether each of the following statements is true (T), false (F), or uncertain (U), and state briefly the reason for your answer. It is to be understood that in each question the appropriate “other things” are to be held constant.

1. The imposition of a minimum wage for labor of type X higher than the preceding wage leads to an increase in the number of laborers of type X employed. It follows that labor of type X is hired under monopsonistic conditions.

2. Under both competition and monopoly in the product market, marginal value product of a factor to a firm is equal to marginal physical product of the firm times marginal revenue to the firm from the sale of the product.

3. Marginal productivity analysis shows that, in the absence of monopsony, a laborer gets as a wage his marginal value product. If this analysis is correct, it follows that unions can raise wages in the absence of monopsony only if they either make each worker more efficient, or increase demand for the product, or make the demand for the product more elastic.

4. The law of variable proportions (or diminishing returns) is contradicted by the fact that agricultural output of this country has increased tremendously despite a decrease in the proportion of the working population on farms.

5. The rate of interest is equal to the rate of time preference of consumers.

6. At present levels of operation, three quarters of the total cost of the XYZ railroad is overhead cost that does not vary with traffic, only one quarter is variable cost. It follows that marginal cost is much less than average cost.

7. The demand curve of an individual firm for a factor of production is identical with its marginal value productivity curve for the same factor of production.

8. The demand curve of a firm for a factor of production is a meaningless concept if the firm is a monopsonistic purchaser of that factor.

9. A declining long run supply curve is impossible in a competitive industry.

10. Marginal factor cost is equal to the price per unit of a factor whenever the product market is competitive.

11. According to the theory of joint demand, the absolute value of the elasticity of derived demand for a factor of production will be smaller the more inelastic the supply of that factor.

12. The fact that individuals do not choose occupations solely on the basis of their pecuniary attractiveness helps explain why the supply curve of labor for a particular occupation has an elasticity greater than zero.

13. If all types of services were used only in fixed proportions, a marginal-productivity theory would be neither necessary nor possible.

14. Our society is often described as a “profit” economy or “profit-maximizing” economy. The word “profit” is here used in the same sense as in the uncertainty theory of “profit.”

15. “Profit” as defined in the uncertainty theory of profit is the expected return to any factor assuming uncertainty over and above the guaranteed expected income it can obtain if it assumes no uncertainty.

16. If one income is higher than another before income tax it will also be higher after a progressive income tax, provided only that the marginal tax never exceeds 100%. It follows that if one accepts the theory that individuals act as if they sought to maximize their income, he must also accept the conclusion that such taxes do not alter individual's actions and hence are not shifted.

17 and 18. A minimum wage law is repealed. The wage rate of a class of workers hired under competitive conditions was equal to the minimum before repeal and falls after repeal. It follows that:

17. The total wage bill for this class of labor will rise, remain constant, or fall, according as the elasticity of demand for labor of this class is greater than, equal to, or less than unity in absolute value.

18. The quantity of labor of this class employed will fall, remain constant, or rise according as the elasticity of supply of labor of this class is positive, zero, or negative.

19. The great technological improvements in the past few decades in the production of synthetic fibers (rayon, nylon, etc.) and associated decline in their relative price has, among other effects, tended to raise the price of meat in general, especially of lamb and mutton.

20. At the same time, stringent rationing of meat consumption in Great Britain, by tending to offset this effect, has improved the competitive position of the synthetic fiber industry, and so enabled it to expand more than otherwise.

The price of nylon thread for use in making women's hosiery was recently lowered drastically when DuPont decided to make much larger quantities available. The resulting decline in the price of hosiery was viewed by at least some manufacturers and retailers as a misfortune and as portending smaller profits for themselves. Were they right? In the short run? In the long run? Justify your answers.

Answer each of the following as true, false or uncertain and justify your answer in the space provided.

Over time in the U.S. since 1929 output of the service industries rose at about the same rate as that of goods. Since the price of services rose at least as rapidly as that of goods, the income elasticity of demand for services would be greater than that for goods.

A weighted average of all price elasticities must add up to one.

Suppose the excise tax on bus travel was reduced and not on plane, train or other travel. This would reduce the use of buses if such travel was a sufficiently strong inferior good relative to other kinds of travel.

The ability of firms of very different sizes to survive in an industry means that the long run marginal cost curve is horizontal over the range of firm sizes that survive.

If an increase in the output of any firm lowered the marginal cost curves of other firms in the same industry (external economies) a competitive industry as a whole might show increasing returns; i.e., have a negatively inclined supply curve.

Short run marginal costs can never be below long run marginal costs.

Suppose that a competitive firm maximizes not income but its sales subject to the constraint that it does not make any losses. Then reduction in the demand for its product might not lead it to reduce output.

Goods X and Y are either substitutes, complements, or independent if an increase in the amount of X either reduces, raises or leaves unchanged the marginal utility of Y.

If the price of a good competitively produced was free to vary and yet did not change much between a seasonal low and a seasonal high in demand, this means that the industry’s long run marginal cost curve was very elastic.

An ad valorem tax, with a tax rate proportional to producer’s price, on a competitive industry that yielded the same revenue at the initial output as a specific tax, fixed amount per unit, would reduce output less than the specific tax.

Economists sometimes say that monopoly is “inefficient”. Explain the meaning of “inefficiency” in this context. Show analytically how this inefficiency comes about.

Give very brief (one paragraph) answers to the following:

(a) Collusions have the natural tendency to break down.

(b) Cost minimization is the general criterion of economic behavior.

(c)Laissez faire capitalism encourages deceitful advertising, dishonesty, and faithlessness. Comment.

(d) Is a person who loses his job through no fault of his own also unemployed thereafter through no fault of his own? Explain.

The literature on the behavior of the firm poses it as a profit maximizer, a wealth maximizer, a growth maximizer, a sales maximizer, a sales maximizer subject to a prescribed profit rate. Which of these do you use (why?) and how do you manage to allow for these other assertions of firm behavior?

Give very brief answers to the following:

(a) Collusions have a natural tendency to break down.

(b) “Bad money tends to drive out good money.”

(c) To incur a cost is equivalent to saying that one has sacrificed an opportunity.

(d) On a television interview a famous theatrical producer expressed delight that tickets to his performance were sold out for the next five months. Explain why he might have cause to be sad instead.

Most cities and towns that allow the sale of alcoholic beverages require all seller of liquor to have a license. Not only is the number of licenses strictly limited, but the prices of such a procedure on: (a) liquor prices; (b) the profits to sellers of liquor at the retail level? What would happen to prices and profits if cities and towns limited the number of licenses and auctioned them to the highest bidder? What are the effects on the distribution of wealth of the price-regulated method versus the market method of allotting licenses?

Discuss the following statement: “In a competitive market the least cost production techniques are revealed through entry and exit, while in public utility regulation they are revealed by commission rate hearing. It is easier to fool the commission than the market. Therefore, whenever possible competition should be permitted.”

Show how behavior of its own members may threaten the survival of a cartel. Show how the behavior of outsiders may threaten it.

Prove that for a monopolist faced with a straight lined demand curve and forced to charge a uniform price to all buyers, total revenue will be at a maximum if the quantity sold is exactly half the quantity which buyers would take at a price of zero. Nota bene: Mathematical exposition will help you here thought not necessary for the answer.

“Monopolistic competition is inefficient.” Explain and evaluate that assertion. Then defend the proposition that neither Pareto optimality nor efficient allocation is a relevant criteria for real decision making in the honest-to-god world.

Gasoline price “wars” have induced many gasoline-station owners to propose a regulatory agency to establish orderly marketing conditions in gasoline markets. Also they proposed that no service station be allowed to charge a price loss than cost, and further that no new stations be opened unless the convenience and necessity of the area warrants more stations.

(a) Who would benefit and who would be hurt by these proposals, if carried out?

(b) If the proposals were carried out, how should the commission decide who got to open a new station?

(c) Is it possible that a gentleman’s agreement could be formed among gasoline station owners in lieu of statutes? Explain why or why not.

What is the difference between collusion, cooperation and competition? How would you define collusion between two people so as to exclude partnerships and corporate joint ownership from the concept of collusion? Why is collusion considered undesirable? How can you differentiate between an effective collusion and an ineffective collusion?

Give very brief (one paragraph) answers to the following:

(a) Collusions have the natural tendency to break down.

(b) Cost minimization is the general criterion of economic behavior.

(c) Laissez faire capitalism encourages deceitful advertising, dishonesty, and faithlessness. Comment.

(d) Is a person who loses his job through no fault of his own also unemployed thereafter through no fault of his own? Explain.

Economists sometimes say that monopoly is “inefficient.” Explain the meaning of “inefficiency” in this context. Show analytically how this inefficiency comes about.

Construct a model of the price discriminating monopolist who sells in two markets. Show the quantities and prices for both markets that will maximize profits. What are the necessary conditions for price discrimination? Does price discrimination lead to a more “socially desirable” outcome? Explain.

Given two isolated markets supplied by a single monopolist, let the two corresponding demand functions be:

$P_1=12-Q_1$ and $P_2=20-3Q_2$

The monopolist’s total cost function is:

$C=3+2(Q_1+Q_2)$

(a) What will the prices be in each market?

(b) What will be the quantity sold in each market?

(c) What will be the total profits earned by the monopolist?

Briefly analyze the following:

(a) The price of cheese falls relative to the price of milk. What is implied about the rate of interest? Why?

(b) Usually there are cheaper prices for matinee performances than evening performances. Why?

(c) “Allowing the price of goods to rise in period when none of the good is being produced is immoral, because the higher prices do not induce a larger output. They merely give unwarranted profits to those who are lucky enough to own the goods. Either prices should be prevented from rising, or the government should take over ownership in order to prevent unjust enrichment.” Evaluate this statement using economic analysis.

(d) Give the definition of interest rates.

Discuss the following statement: “In a competitive market the least-cost production techniques are revealed by entry and exit, while in public utility regulation they are revealed by commission rate hearings. It is easier to fool the commission than the market. Therefore whenever possible, competition should be permitted.”

Both monopolists and purely competitive firms are assumed to behave as if they seek to maximize profits, yet monopoly is held to result in an inefficient allocation of resources as compared to pure competition. Explain. Marginal costs serve as a guide as to how much of a good product, while average variable costs help indicate whether to produce at all. Explain.

You are the absolute czar and head of a union of 1,000 plumbers in Austin, Texas. You have the absolute power to set the wage at which the plumbers will work. The economist that you have hired tells you that the demand for plumbers in Austin is $Q=1,200-100W$, where $Q$ is the number of plumbers employed and $W$ is their wage per hour. This demand function can also be written $W=12-Q/100$. If there are no other plumbers in Austin, what wage would you set if (a) you wished to achieve full employment at the highest possible wage; (b) you wished to maximize total payments to plumbers?

Economists Armen Alchian and Reuben Kessel have advanced the hypothesis that monopolists choose to satisfy more of their non-pecuniary aims than do perfect competitors. Consider the following aims: (a) exercising their preferences against certain minorities, (b) enjoying the good life with lush expense accounts for executives. What theoretical arguments could support this hypothesis? How might you test this hypothesis?

You are given the following demand function for the firm:

$Q=20-p$. Its total cost function is $TC=Q^2+8Q+2$. Find

(a) profit-maximizing output

(b) equilibrium price

(c) elasticity of demand at the equilibrium price

(d) profits

Is this firm a price-taker or price-searcher? Why?

The supply curve for labor is $S_L=100W$, where $W$ is the market wage. The marginal revenue product curve for the firm is $D_L=-50W+450$.

(a) If the firm is a monopsonist, how many workers will it hire in order to maximize profits? What will be the wage?

(b) If the supply of labor is monopolized, how many workers are supplied in order to maximize the wage bill? What is that wage?

Give brief answers to each of the following:

(a) “Since a monopolist is the only supplier of a well-defined product, there is no limit to the price it may charge.” Is this statement true or false?

(b) Explain why a monopolist will never set a price (and produce the corresponding output) at which the demand is price-inelastic.

(c) “The ultimate monopoly product would be one whose cross elasticity of demand, with respect to any and all other products, was zero.” Comment.

(d) “The reason movie theaters charge youngsters and oldsters less than the rest of us is because theater owners want to help these two low-income groups.”

Why might the existing firms in a cartelized industry prefer to be regulated by the government?

“Public policy is necessary to protect the average citizen from the power of vested interest groups. In the absence of government intervention, regulated industries, such as airlines, railroads, and trucking, would charge excessive prices. Products would be unsafe, and the rich would oppress the poor. Government curbs the power of special interest groups.” Comment saying why you agree or disagree with the accuracy of that statement.

Assume that the soft coal industry is a competitive industry and it is in long run equilibrium. Now assume that the firms in the industry form a cartel.

(a) What will happen to the equilibrium output and price of coal, and why?

(b) After the cartel is operating, are there incentives for the individual firms to cheat? Why?

(c) Does the possibility of entry by all the firms make a difference in the behavior of the cartel?

Give brief answers to each of the following:

(a) “Since a monopolist is the only supplier of a well- defined product, there is no limit to the price it may charge.” Is this statement true or false?

(b) Explain why a monopolist will never set a price (and produce the corresponding output) at which the demand is price-inelastic.

(c) “The ultimate monopoly product would be one whose cross elasticity of demand, with respect to any and all other products, was zero.” Comment.

(d) “The reason movie theaters charge youngsters and oldsters less than the rest of us is because theater owners want to help these two low-income groups.”

Assume that the soft coal industry is a competitive industry and it is in long run equilibrium. Now assume that the firms in the industry form a cartel.

(a) What will happen to the equilibrium output and price of coal, and why?

(b) After the cartel is operating, are there incentives for the individual firms to cheat? Why?

(c) Does the possibility of entry by all potential firms make a difference in the behavior of the cartel?