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

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260 PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLY [CHAP. 10often so large in relation to the market as to leave only a few firms in the industry. Perfect competition undersuch circumstances would either be impossible or lead to prohibitive costs.(c) While the perfectly competitive firm, when in long-run equilibrium, produces where P ¼ LMC, for the imperfectlycompetitive firm P . LMC and so there is an underallocation of resources to the firms in imperfectlycompetitive industries and a misallocation of resources in the economy. That is, under all forms of imperfectcompetition, the firm is likely to produce less, and charge a higher price, than under perfect competition. Thisdifference is greater under pure monopoly and oligopoly than under monopolistic, competition because of thegreater elasticity of demand in monopolistic competition.(d ) Finally, waste resulting from excessive sales promotion is likely to be zero in perfect competition and greatestin oligopoly and monopolistic competition.10.24 It is often asserted that businesspeople often have no knowledge of the exact shape of the demand curveand cost curves that they face and so cannot determine their best level of output and price to charge.Therefore, most of microeconomics is “academic” and irrelevant. How would you counter suchcharges?It is true that businesspeople often have no knowledge of the shape of the demand curve and cost curves that theyface. In the real world many businesspeople in imperfectly competitive markets set prices at the level of their estimatedaverage cost plus a certain percentage, or “markup,” of costs (see Section 11.5). However, those firms whoconstantly set their prices at levels far different from those consistent with the MR ¼ MC condition are likely togo out of business in the long run. On the other hand, those firms which, by a process of trial and error, correctlyestimate the “best” price to charge are more likely to make profits, to remain in business in the long run, and toexpand.The study of the general principles of demand, production, and cost can be very useful as guidelines in thisestimation process. They also introduce a rational and logical way of thinking for the firm to follow in its productionand pricing policies. In addition, they will surely stimulate the alert entrepreneur to collect more pertinent data.Note, however, that sometimes the firm may purposely not want to charge the price that would lead to profitmaximization, even if it knew exactly what that price should be. One reason for this was given in Probleml0.20(c). Another reason to limit profits might be to discourage potential entrants into the oligopolistic or monopolisticindustry. This is called limit pricing.PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLYWITH CALCULUS 10.25 Suppose that the market demand function for a two-firm equal market sharing cartel isQ ¼ 120and that the total cost function of each duopolist is10PTC 0 ¼ 0:1Q 2Determine, using calculus, the best level of output of each duopolist, the price at which each will sell thecommodity, and the total profits of each.The half-share market faced by each duopolist isQ 0 ¼ 60 5P or P 0 ¼ 12 0:2Qso that TR 0 ¼ P 0 Q 0 ¼ (12 0:2Q 0 )Q 0 ¼ 12Q 0 0:2Q 0 2andMR 0 ¼ d(TR)0dQ 0 ¼ 12 0:4Q 0The marginal and average total cast of each duopolist isMC 0 ¼ d(TC 0 )dQ 0 ¼ 0:2Q 0 and ATC 0 ¼ TC 0Q 0 ¼ 0:1Q 0 2Q 0 ¼ 0:1Q 0
CHAP. 10] PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLY 261Setting MC 0 equal to MR 0 , we get0:2Q 0 ¼ 12 0:4Q 00:6Q 0 ¼ 12Q 0 ¼ 20and P 0 ¼ 12 0:2(20) ¼ $8Therefore, TR 0 ¼ 12(20) 0:2(20) 2 ¼ 240 80 ¼ $160and p 0 ¼ TC 0 ¼ 160 0:1(20) 2 ¼ 160 40 ¼ $120
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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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4 INTRODUCTION [CHAP. 13. The meani
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6 INTRODUCTION [CHAP. 11.3 Distingu
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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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84 CONSUMER DEMAND THEORY [CHAP. 4c
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86 CONSUMER DEMAND THEORY [CHAP. 4T
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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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132 THEORY OF PRODUCTION [CHAP. 6(b
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136 THEORY OF PRODUCTION [CHAP. 6(b
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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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154 COSTS OF PRODUCTION [CHAP. 7Lon
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160 COSTS OF PRODUCTION [CHAP. 7The
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162 COSTS OF PRODUCTION [CHAP. 7(b)
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164 COSTS OF PRODUCTION [CHAP. 7(a)
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166 COSTS OF PRODUCTION [CHAP. 7LMC
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172 COSTS OF PRODUCTION [CHAP. 7amo
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176 COSTS OF PRODUCTION [CHAP. 7(a)
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178 COSTS OF PRODUCTION [CHAP. 7Sub
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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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310 INPUT PRICING AND EMPLOYMENT [C
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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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