Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

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258 PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLY [CHAP. 10Fig. 10-2110.21 Assume that (1) in a purely oligopolistic industry there is one dominant firm that acts as the priceleader and ten identical small firms, (2) the total market demand function for the commodity isQD ¼ 240 2 10P and P is given in dollars, (3) the SMC function for the dominant firm is given byq/$5 for q . 10 units, while the SMC function for each of the small firms is given by $1 for q . 4units and the AVC for each of the small firms is $4 at four units of output, and (4) factor pricesremain constant, no matter the quantity of factors demanded per time period. (a) On the same set ofaxes, sketch D, the short-run supply curve of all the small firms combined, the demand curve of thedominant firm, its marginal revenue curve, and marginal cost curve. (b) What price will the dominantfirm set? How much will all the small firms together and the dominant firm sell at that price? (c) What dothe cartel and price leadership models have in common?Fig. 10-22
CHAP. 10] PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLY 259(a)(b)(c)In Fig. 10-22, the P MC s curve represents the short-run supply curve of all the small firms together. This is sobecause the small firms, in following the price leader, behave as perfect competitors, and factor prices remainconstant. Since the AVC for each of the small firms is $4 at four units of output, they will supply nothing atprices below $4 per unit. By subtracting P MC s from D at each price, we get the demand curve faced by thedominant firm. This is given by HNMGF. Note that since the small firms supply nothing at prices below $4, thedemand curve of the dominant firm coincides with the market demand curve over segment GF.The dominant firm will set the price of $10, at which it can sell its best level of output of 40 units (givenby point E, where mr d ¼ SMC d ). Since each of the small firms can sell all it wants at this price, each facesan infinitely elastic demand curve (which coincides with its marginal revenue curve) at the price of $10.Each of the small firms produces where P ¼ MR ¼ SMC ¼ $10, and all of them together produce 100units (point R on the P MC s curve), leaving 40 units (RC) to be sold by the dominant firm (shown bypoint N on its demand curve). To find the amount of profit, we need the SAC at the best level ofoutput for each firm.In the cartel and price leadership models, the oligopolists recognize their mutual dependence and act collusively.The collusion is perfect in the cartel models and imperfect in the price leadership models.LONG-RUN EFFICIENCY IMPLICATIONS10.22 (a) What are some of the natural and artificial barriers to entry into certain oligopolistic industries?(b) What are the possible harmful effects of oligopoly? (c) What are the possible beneficial effects ofoligopoly?(a)(b)(c)The natural barriers to entry into such oligopolistic industries as the car, aluminum, and steel industries are thesmallness of the market in relation to efficient operation and the huge amounts of capital and specialized inputsrequired to start efficient operation. Some of the artificial barriers to entry are control over sources of rawmaterials, patents, and government franchise. When entry is blocked or at least restricted (the usual case),the firms in an oligopolistic industry can earn long-run profits.In the long run, oligopoly may lead to the following harmful effects: (1) as in monopoly, price usually exceedsLAC in oligopolistic markets, (2) the oligopolist usually does not produce at the lowest point on his LACcurve, (3) P , LMC, so there is an underallocation of the economy’s resources to the firms in the oligopolisticindustry, and (4) when oligopolists produce a differentiated product, too much may be spent on advertising andmodel changes.For technological reasons (economies of scale), many products (such as cars, steel, aluminum, etc.) cannotpossibly be produced under conditions of perfect competition (or their cost of production would be prohibitive).In addition, oligopolists spend a great deal of their profits on research and development, and many economistsbelieve that this leads to much faster technological advance and higher standards of living than if theindustry were organized along perfectly competitive lines. Finally, some advertising is useful since it informsconsumers, and some product differentiation has the economic value of satisfying the different tastes ofdifferent consumers.10.23 Compare the efficiency implications of long-run equilibria under different forms of market organization,with respect to (a) total profits, (b) the point of production on the LAC curve, (c) allocation of resources,and (d) sales promotion.(a)(b)It is difficult to interpret and answer this question since cost curves probably differ under various forms ofmarket organization. A few generalizations can nevertheless be made, if they are interpreted with caution.First, the perfectly competitive firm and the monopolistically competitive firm break even when the industryis in long-run equilibrium. Thus, consumers get the commodity at cost of production. On the other hand, themonopolist and the oligopolist can and usually do make profits in the long run. These profits, however, maylead to more research and development and therefore to faster technological progress and rising standard ofliving in the long run.While the perfectly competitive firm produces at the lowest point on its LAC curve when the industry is inlong-run equilibrium, the monopolist and the oligopolist are very unlikely to do so, and the monopolistic competitornever does so when the industry is in long-run equilibrium. However, the size of efficient operation is
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SCHAUM’SOUTLINE OFMICROECONOMICSF
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ProfessionalWant to learn more?We h
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PREFACEvimicroeconomic theory and r
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viiiCONTENTS4.5 Characteristics of
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xCONTENTS10.8 The Kinked Demand Cur
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2 INTRODUCTION [CHAP. 1owners to bu
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8 INTRODUCTION [CHAP. 1(c)In the mo
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10 INTRODUCTION [CHAP. 1Table 1.2Pr
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12 INTRODUCTION [CHAP. 1PARTIAL EQU
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CHAPTER 2Demand, Supply,and Equilib
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16 DEMAND, SUPPLY, AND EQUILIBRIUM:
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40 THE MEASUREMENT OF ELASTICITIES
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CHAPTER 4Consumer DemandTheory4.1 T
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64 CONSUMER DEMAND THEORY [CHAP. 4A
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98 CONSUMER DEMAND THEORY [CHAP. 4i
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CHAPTER 5Advanced Topics inConsumer
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104 ADVANCED TOPICS IN CONSUMER DEM
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CHAPTER 6Theory of Production6.1 PR
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120 THEORY OF PRODUCTION [CHAP. 6EX
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122 THEORY OF PRODUCTION [CHAP. 66.
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128 THEORY OF PRODUCTION [CHAP. 6(a
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142 THEORY OF PRODUCTION [CHAP. 6eq
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144 THEORY OF PRODUCTION [CHAP. 6(c
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CHAPTER 7Costs of Production7.1 SHO
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148 COSTS OF PRODUCTION [CHAP. 77.3
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150 COSTS OF PRODUCTION [CHAP. 7EXA
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166 COSTS OF PRODUCTION [CHAP. 7LMC
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176 COSTS OF PRODUCTION [CHAP. 7(a)
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180 MIDTERM EXAMINATIONAnswers1. (a
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182 MIDTERM EXAMINATION(b)AC ¼ AVC
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CHAPTER 8Price and Output UnderPerf
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186 PRICE AND OUTPUT UNDER PERFECT
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CHAPTER 14General Equilibriumand We
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314 GENERAL EQUILIBRIUM AND WELFARE
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CHAPTER 15The Economics ofInformati
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338 THE ECONOMICS OF INFORMATION [C
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348 FINAL EXAMINATIONsimultaneously
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350 FINAL EXAMINATION 6. (a) The co
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352 INDEXDecreasing cost industry 1
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354 INDEXMonopolistic competition:
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356 INDEXTime preference 106Total c
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Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

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