Micro economics Essay Paper Assignment

Micro economics

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Assignment # 4 Spring 2014

Please complete the sections on Monopoly price and MR; and Monopolistic competition price, quantity and costs. For each of these two sections, explain what was the most important concept you learned in that lesson (and why) and please explain how the lesson could be improved.

1. Complete a table for Q, Price, TC, MC, MR and profits. This time start the price at the number of P = 9 combined for Q = 1, and then reduce the price as Q increases. For costs, begin with TC = 4 at Q = 1, then you may use any numbers you like for costs. You may need to play around with the numbers to make this work out. Show that MR = MC at profit maximization. Graph MR, MC and P and show the profit maximizing level of output. (You don’t need to graph ATC and show the profit rectangle).

2. During your next trip to the supermarket (Use this website for the supermarket, https://www.ralphs.com/ ) find two examples of different goods for which the market is oligopolistic. ( Please use breakfast cereals and Soft drinks) Make certain that you have chosen a ‘good’ and not a brand name. Remember that several brand names compete in a market. List all the brand names (or at least four brands if there are dozens) and the parent company for each brand name (check the package carefully so that you don’t confuse brand names with the actual producer.) For each good, what is your evidence that this market is oligopolistic? (Number of producers; shelf space give to each one; identical pricing.)

3. The Prisoner’s Dilemma is a famous game in game theory in which two prisoners must decide whether or not to cooperate with another, that is declares their mutual innocence. If both prisoners cooperate, that is do not confess their mutual guilt, then they both go free. If one prisoner cooperates, but the other does not, then the non-cooperating prisoner receives a lighter sentence and the cooperating prisoner is punished severely for refusing to confess. If both prisoners refuse to cooperate—that is they both say the other is guilty—then they both are punished, but less than if only one declared his innocence.
a. Play the Prisoner’s Dilemma at: http://serendip.brynmawr.edu/playground/pd.html Try one set of rounds for practice.
b. Design a strategy for the game. Describe it and then test the strategy in three rounds of the game. Did it work?
c. How is this game similar to the game theory we discussed in class?

4. Every year there are new and sometimes unexpected lawsuits against US corporations. Choose a case for study at the web site http://www.usdoj.gov/atr/cases.html

You will find many, many antitrust lawsuits listed alphabetically. Please choose two,
a) one involving any aspect of antitrust. Summarize what was the alleged violation and what happened (if anything). Please do so in your own words (that is, not cut and pasting from the site).
b) one involving a merger or acquisition (you may need to look at several to find one.) Again, summarize what was the alleged violation and what happened (if anything). Please do so in your own words (that is, not cut and pasting from the site).

5. Now that we’re at the end of the semester, I’d like you to think about what you have learned in this course. One good measure of learning is the ability to ask good questions. That is: what is it that you would like to understand better about one of the concepts we’ve studied in economics?

a) Specify the question: what is it that you would like to understand better about one of the concepts we’ve studied in economics?
b) Why don’t you fully understand this concept?
c) Why is it important for us to fully understand this concept?

SAMPLE ANSWER

1. Graph of MR, MC and P and the profit maximizing level of output

According to the graph above the maximizing level of output (Q) is 5 units. That’s when Marginal Revenue (MR) is 7 and Marginal Cost (MC) is 7. As the Marginal Cost moves beyond 7 Marginal revenue starts dropping and Q starts increasing whereas P starts reducing. This is because demand starts falling as quantities increase. The company now starts making losses (Ruffin, 30).

2) According to Ciobanu (229), a market that is oligopolistic is whereby sellers in the market are a few large companies, products sold by these companies are relatively homogeneous, entry into the market is difficult because of high entry costs and the firms are essentially interdependent. Oligopolistic markets are also characterized by price rigidity in that firms tend to watch what their competitors do before adjusting prices upwards or downwards. This is because if a firm increases the price of its commodities and its competitors do not follow suit it will experience a marked reduction in sales which will force it to reduce it prices to match what the competitors are offering their products at (Ciobanu, 229). The main drinks identified are coca-cola made by Coca-Cola Company, Dr Pepper made by Dr Pepper/7Up Inc, Fanta  and sprite made by Coca-Cola Company, Pepsi and Mountain Dew which is licensed by Pepsi Company. The evidence that this market is oligopolistic is that the products are relatively homogeneous, they are sold by large companies, entry into the market is difficult because of relatively high cost of entry and pricing is relatively identical (Ciobanu, 229).

3)  a). The first option that I chose was cooperate all throughout the game and then I chose compete all through, then I chose two thirds of the game to cooperate and a third to compete and lastly compete and cooperate in equal proportions as the last option (http://serendip.brynmawr.edu/playground/pd.html)

b). The strategy that generates the highest points/gold coins is to cooperate.  This strategy involves cooperating with Serendip in each round of the game. I tested the strategy and it did work perfectly (http://serendip.brynmawr.edu/playground/pd.html).

c). In this game the actions of one player influences the actions of his opponent in the game. In this game, each player must anticipate the actions of the other player. Game theory primarily involves identification of situations in which making decisions is interdependent with decisions made by the other party. Game theory involves anticipating and in many cases influencing another entity’s choices (Schelling, 26). Game theory is similar to this game because the decisions that I made influenced the decisions that Serendip made. I knew Serendip subscribed to a policy of “tit for tat” and therefore when I chose to co operate Serendip also made the same decision. I anticipated that he will make the same choice as I made. Just like in the game theory I anticipated Serendip’s reactions to the choices I made and I also tried to influence his decisions by my actions (Schelling, 26).

4 (a) One of the antitrust lawsuits listed in http://www.usdoj.gov/atr/cases.html is U.S.v. Ryoji Fukodome and Toshihiko Nagashima. In this antitrust law suit the defendants Ryoji Fukodome and Toshihiko Nagashima with their other undisclosed co-conspirators colluded to suppress and eliminate competition in the automotive parts industry by bid rigging and setting uncompetitive prices for parts sold to Subaru in the United States of America and in other vehicle assembling plants in the world. It was alleged that the accused in meetings held in Japan set prices and rigged bids with the intention of blocking other competitors.  It was alleged that the accused parties interfered with trade between states in the US and also foreign trade and commerce by their actions (http://www.usdoj.gov/atr/cases.html).

1. b) An antitrust lawsuit involving a merger was S. v. Abitibi-Consolidated Inc. and Bowater Incorporated. In this lawsuit it was alleged that Abitibi-Consolidated Inc and Bowater Incorporated had set plans to form a $1.6 billion merger which would have resulted in the largest newsprint company in the North America. It was argued that the merger would have resulted in such a large company that it could limit production of newsprint by reducing its capacity utilization thus pushing prices up and suppressing competition. It was held that the new company had the incentive to do so once the merger was finalized. The company was to be about three times larger than its nearest competitor. In violation of Section 5 of the Clayton Act 15 U.S.C &, 18, the merger would have led to a suppression of competition in the production and sale of newsprint. The merger would also have eliminated competition between the two giant competitors which would have led to an increase in newsprint prices in the USA. The court directed that the companies divest the divestiture assets within a stipulated period which in effect stalled the merger plan (http://www.usdoj.gov/atr/cases.html).
2. The concept which I would like to understand in a more detailed manner is the various aspects of antitrust behavior. a) What are the different types of antitrust behavior that companies practice?
3. b) The reason why I have not understood this concept fully is because of the many interpretations and classes of what antitrust behavior and actions constitute c) The reason why it is important to fully understand this concept is to enable me understand how to avoid antitrust behavior and evade huge fines that may lead to the bankruptcy of my company.

Works Cited

Ciobanu, Ramona. “CONSIDERATIONS REGARDING PRICE IN OLIGOPOLISTIC STRUCTURED MARKETS.”Bulletin of the Transilvania University of Brasov.EconomicSciences.Series V 4.2 (2011): 229-38. ProQuest.Web. 30 May 2014.

http://www.usdoj.gov/atr/cases.html

http://serendip.brynmawr.edu/playground/pd.html

Ruffin, Roy J. Monopolistic Competition. Princeton: Princeton University Press, 2009. ProQuest.Web. 30 May 2014.

Schelling, Thomas C. “GAME THEORY: A PRACTITIONER’S APPROACHst.” Economics and Philosophy 26.1 (2010): 27-46. ProQuest.Web. 30 May 2014.

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