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Page 133 1a. The perfect competitor’s demand curve is perfectly elastic, since the business is a price taker. b. A relatively elastic curve applies to a monopolistic competitor, because of limited market power due to product differentiation. c. Because it is the sole seller of a product with no close substitutes, the monopolist has a demand curve that is less elastic than for businesses in other markets. d. A kinked demand curve applies to an oligopolist in a market where rivalry prevails. This is because of the differing reactions of the business’s rivals to an increase or decrease in price. Page 138 1a. The change in total revenue between the two output levels, which is $8 million [= ($20 x 400 000)] at 400 000 prescriptions and $7.5 million [= ($15 x 500 000)] at 500 000 prescriptions, is divided by the change in output [($8 million - $7.5 million)/(500 000 – 400 000) = ($500 000/100 000)]. This gives a marginal revenue of $5. b. Since demand (which equals average revenue) is downsloping for a monopolist, marginal revenue is below the demand curve and therefore less than price. This ensures that price falls as output expands. c. 2a. Yes, profit is maximized at this output and price, because this is where marginal cost (MC) and marginal revenue (MR) are equal. b. Output will now exceed 100 000 units and price will be less than $6. Perfectly competitive businesses operate at the intersection of the market demand (D) and supply (S) curves. While D is the same as in the case of monopoly, S is a portion of the monopolist’s MC curve. Because D and S cross at a point to the right of the intersection of the monopolist’s MC and MR curves, perfectly competitive output is higher. Moreover, the perfectly competitive price is found further along the downsloping D curve, so it is lower. Page 145 1a. Total revenue is $400 [= ($.04 x 10 000)] at 10 000 copies and $450 [= ($.03 x 15 000)] at 4000 kgs. Dividing this difference by the change in output gives the marginal revenue of 1 cent [= ($450 - $400)/(15 000 – 10 000)]. b. As in the case of monopoly, demand (which equals average revenue) is downsloping for a monopolistic competitor. To ensure that price falls as output expands, marginal revenue must be below the demand curve and therefore less than price. c. 2a. The business makes a short-run loss, with its $5 price below the $6 average cost. In the long run, as some of its competitors leave the market, this business will see an outward shift in its demand curve. The curve will also become less elastic, with fewer close substitutes for the business’s output. The short-run loss gradually disappears as the business moves towards its long-run equilibrium point. b. The business now makes a profit, with its $5 price greater than the $4 average cost. In the long run, new businesses enter the market. This business will see a leftward shift in its demand curve, and the curve will become more elastic, because there are more close substitutes for the business’s output. This time, the business’s profit gradually disappears as it approaches its long-run equilibrium point. 3a. At the output associated with the kink in the demand curve, the business’s marginal revenue (MR) curve is a vertical segment. This is because the MR curve has two downsloping segments – each associated with one part of the kinked demand curve – and the vertical segment running between these two downsloping MR segments. b. As long as the marginal cost curve continues to intersect marginal revenue along the MR curve’s vertical segment, there will be no change in the business’s profit-maximizing output or price. This is significant because it shows that oligopolists in markets characterized by rivalry are reluctant to vary their price. Page 150 1a. Total industry sales are $24 million [= (12 x $2 million)], while sales of four of the firms are $8 million [= (4 x $2 million)]. (There is no need to distinguish among the firms since all are exactly the same size.) Hence the four-firm concentration ratio is .33 [= ($8 million/$24 million)]. b. Given that the four-firm concentration ratio is below 50 percent, this industry can be classified as monopolistically competitive. c. A business in this market may choose to engage in non-price competition to distinguish its product from that of rivals. If so, the business’s motive would be to increase its demand and make demand less elastic, allowing the business to raise its price. d. No. Non-price competition is legal in Canada. e. It would be a horizontal merger, since both businesses are in the same industry. 2. No. While big businesses may be able to pass on cost-savings to consumers, they also tend to have significant market power, which means that consumers do not always benefit from these cost savings. Moreover, there is a good chance that technical innovation by these businesses will not be as rapid as in more competitive markets. |