Chapter 16 Checkpoint

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17
Monopolistic Competition
CHECKPOINTS
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Checkpoint 17.1
Checkpoint 17.2
Checkpoint 17.3
Problem 1
Problem 1
Problem 1
Clickerversion
Problem 2
Problem 2
Problem 2
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Clicker version
Problem 3
Problem 3
Clicker version
Problem 3
Clickerversion
Clickerversion
Problem 4
In the news
Clickerversion
In the news
In the news
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CHECKPOINT 17.1

• Practice Problem 1
• The table shows the total revenue of the 50 firms
  in the tattoo industry.
• Calculate the four-firm concentration ratio and
  the HHI.
• What is the market structure of the tattoo
  industry?

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CHECKPOINT 17.1

• Solution
• The four-firm concentration ratio is 46.6.
• The market shares of the four largest firms are
  17.1, 12.4, 9.5, and 7.6.

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CHECKPOINT 17.1

• The market shares from the largest to the
  smallest are 17.1, 12.4, 9.5, 7.6, 1.9, and 0.8
  percent.
• HHI is the sum of the square of the shares of 50
  largest firms.
• HHI 292.41 153.76 90.25 57.76 (3.61 x
  16) (0.64 x 30)
• The HH1 is 671.14.

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CHECKPOINT 17.1

• The four-firm concentration ratio and the HH1
  suggest that the tattoo industry is an example of
  monopolistic competition unless there are other
  reasons that would make the concentration
  measures unreliable guides.

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CHECKPOINT 17.1

• Practice Problem 2
• The table shows the total revenue of the 50 firms
  in the tattoo industry.
• What would be the market structure of the tattoo
  industry if each of the 50 firms operated in a
  different city and the cities are spread across
  the nation?

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CHECKPOINT 17.1

• Solution
• If the 50 firms in the tattoo industry operate in
  different cities spread across the nation, each
  firm is effectively without competition.
• The market might be a series of monopolies.

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Study Plan ProblemIf each firm in the tattoo
industry operated in a different city and the
cities are spread across the nation, the market
might _______.
CHECKPOINT 17.1
Total revenue of the 50 firms in the tattoo
industry.

1. be a series of monopolies
2. collapse because of lack of competition
3. be monopolistic competition
4. be perfect competition

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CHECKPOINT 17.1

• Practice Problem 3
• The table shows the total revenue of the 50 firms
  in the tattoo industry.
• What additional information would you need about
  the tattoo industry to be sure that it is an
  example of monopolistic competition?

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CHECKPOINT 17.1

• Solution
• The additional information needed is information
  about product differentiation competition on
  price, quality, and marketing and evidence of
  low barriers to the entry of new firms.

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Study Plan Problem What additional information
would you need about the tattoo industry to be
sure that it is an example of monopolistic
competition?
CHECKPOINT 17.1
Total revenue of the 50 firms in the tattoo
industry.

1. Barriers to entry
2. Competition on quality and marketing
3. Competition on price
4. Product differentiation
5. All of the above

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CHECKPOINT 17.1

• Practice Problem 4
• The table shows the total revenue of the 50 firms
  in the tattoo industry.
• Suppose that a new tattoo technology makes it
  easier for anyone to enter the tattoo industry.
• How might the market structure of the tattoo
  industry change?

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CHECKPOINT 17.1

• Solution
• This new tattoo technology would most likely lead
  to the entry of more firms, greater product
  differentiation, and more competition.

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Study Plan Problem Suppose that a new tattoo
technology makes it easier for anyone to enter
the tattoo industry.You would expect _______ in
product differentiation and ______competition on
product quality, price, and marketing.
CHECKPOINT 17.1
Total revenue of the 50 firms in the tattoo
industry.

1. no change less
2. an increase more
3. a decrease more
4. an increase no change
5. a decrease less

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CHECKPOINT 17.1

• In the news
• Is a prepaid phone plan right for you?Cell-phone
  providers are offering new no-contract plans. For
  example, Tmobiles flexpay plans allow users to
  buy monthly service Boost Mobiles no-contract
  plan has use and Virgin Mobiles plan has
  unlimited calling for 49.99 a month. All
  providers are actively marketing their
  no-contract plans.
• Source Wall Street Journal, April 22, 2009
• In what type of market are cell-phone plans sold?
  Explain your answer.

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CHECKPOINT 17.1

• Solution
• The market structure is monopolistic competition.
  
• The number of cell-phone providers is large, and
  they offer differentiated services.
• No firm dominates the market and the firms
  compete on quality, price, and marketing.
• New cell-phone providers can enter the market
  with their own plan.

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CHECKPOINT 17.2

• Practice Problem 1
• Natti has a website at which people can design
  and buy a pair of sunglasses.
• Natti pays 4,000 a month for her Web server and
  Internet. The glasses are made by a firm, which
  Natti pays 50 a pair. Natti has no other costs.
• Calculate Nattis profit-maximizing output,
  price, and economic profit.

The demand schedule for Nattis sunglasses.
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CHECKPOINT 17.2

• Solution
• Marginal cost, MC, is 50 a pairthe price that
  Natti pays her supplier of glasses.
• The figure shows the demand, marginal revenue,
  and marginal cost curves.
• Profit is maximized when MC MR and Natti sells
  100 pairs a month.

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CHECKPOINT 17.2

• The price is 150 a pair, and average total cost,
  ATC, is 90 a pairthe sum of 50 marginal (and
  average variable) cost and 40 average fixed
  cost.
• Economic profit is 60 a pair on 100 pairs a
  month, so economic profit is 6,000 a month.

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CHECKPOINT 17.2

• Practice Problem 2
• Natti has a website at which people can design
  and buy a pair of sunglasses.
• Natti pays 4,000 a month for her Web server and
  Internet. The glasses are made by a firm, which
  Natti pays 50 a pair. Natti has no other costs.
• Do you expect other firms to enter the industry?

The demand schedule for Nattis sunglasses.
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CHECKPOINT 17.2

• Solution
• Natti is making an economic profit, so other
  firms have an incentive to enter the industry and
  will do so.

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CHECKPOINT 17.2

• Study Plan Problem
• Natti has a website at which people can design
  and buy a pair of sunglasses.
• Natti pays 4,000 a month for her Web server and
  Internet. The glasses are made by a firm, which
  Natti pays 50 a pair. Natti has no other costs.

The demand schedule for Nattis sunglasses.
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Do you expect other firms to enter the Web
sunglasses business?
CHECKPOINT 17.2
The demand schedule for Nattis sunglasses.

1. Other firms have no incentive to enter the
   market.
2. Other firms have an incentive to enter the market
   and will do so.
3. Other firms have an incentive to enter the market
   but barriers prevent them.
4. Some firms will exit the market.
5. As other firms enter, Natti will exit the market.

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CHECKPOINT 17.2

• Practice Problem 3
• Natti has a website at which people can design
  and buy a pair of sunglasses.
• Natti pays 4,000 a month for her Web server and
  Internet. The glasses are made by a firm, which
  Natti pays 50 a pair. Natti has no other costs.
• What happens to the demand for Nattis sunglasses
  and Nattis profit in the long run?

The demand schedule for Nattis sunglasses.
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CHECKPOINT 17.2

• Solution
• Because Nattis is making a positive economic
  profit, firms will enter the market and the
  demand for Nattis sunglasses will decrease.
• The demand curve for Nattis sunglasses will
  shift leftward.
• As the demand for Nattis sunglasses decreases,
  her economic profit also decreases.
• In long-run equilibrium, Nattis makes zero
  economic profit.

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CHECKPOINT 17.2

• Study Plan Problem
• Natti has a website at which people can design
  and buy a pair of sunglasses.
• Natti pays 4,000 a month for her Web server and
  Internet. The glasses are made by a firm, which
  Natti pays 50 a pair. Natti has no other costs.

The demand schedule for Nattis sunglasses.
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In the long run, the demand for Nattis
sunglasses _______and in long-run equilibrium,
Nattis _______.
CHECKPOINT 17.2
The demand schedule for Nattis sunglasses.

1. increases economic profit increases
2. decreases shuts down
3. decreases makes zero economic profit
4. decreases incurs an economic loss

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CHECKPOINT 17.2

• In the news
• Condé Nast shuts down Portfolio
• Condé Nast Publications launched its monthly
  business magazine Portfolio less than two years
  ago. In late 2008, Condé Nast cut its payroll and
  advertising budgets by 5 percent across all of
  its titles. Portfolio was hit with the biggest
  cuts. Recently, Condé Nast shut down Portfolio.
• Source Wall Street Journal, April 28, 2009
• Explain the effects of the payroll and
  advertising budgets cuts on Condé Nast loss in
  the short run.
• Why did Condé Nast shut down Portfolio?

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CHECKPOINT 17.2

• Solution
• Payroll and advertising budgets are variable
  costs, so a cut in these costs shifts the ATC and
  MC curves downward.
• With no change in the prices of the magazines,
  Condé Nasts economic loss decreased.
• Condé Nast shut down Portfolio because its loss
  from Portfolio exceeded its total fixed cost and
  the company expected the loss to continue in the
  coming year.

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CHECKPOINT 17.3

• Practice Problem 1
• Bianca bakes delicious cookies. Her total fixed
  cost is 40 a day, and her average variable cost
  is 1 a bag.
• Few people know about Biancas Cookies, and she
  maximizes profit by selling 10 bags a day for 5
  a bag.
• Bianca thinks that if she spends 50 a day on
  advertising, she can increase her market share
  and sell 25 bags a day for 5 a bag.
• If Biancas belief about the effect of
  advertising is correct, can she increase her
  economic profit by advertising.

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CHECKPOINT 17.3

• Solution
• With no advertising, Biancas total revenue is
  50 (10 bags at 5 a bag) and her total cost is
  50 (the sum of 40 total fixed cost and 10
  total variable cost).
• So her economic profit is zero.
• With 50 a day advertising expenditure, Bianca
  has a total revenue of 125 (25 bags at 5 a bag)
  and total cost of 115 (total fixed cost is 90,
  and total variable cost is 25).
• Her economic profit with no price change is 10,
  so Bianca can increase her economic profit by
  advertising.

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Study Plan ProblemBianca bakes delicious
cookies TFC is 40 a day, AVC is 1 a bag and
she maximizes profit by selling 10 bags a day for
5 a bag.Bianca thinks that if she spends 50 a
day on advertising, she can sell 25 bags a day
for 5 a bag. If Biancas belief about the effect
of advertising is correct, she ________.
CHECKPOINT 17.3

1. cannot increase her economic profit by
   advertising because advertising increases her
   average total cost
2. cannot increase her economic profit by
   advertising because advertising increases her
   total cost
3. can increase her economic profit by advertising
   only if she raises the price of her cookies
4. can increase her economic profit by advertising

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CHECKPOINT 17.3

• Practice Problem 2
• Bianca bakes delicious cookies. Her total fixed
  cost is 40 a day, and her average variable cost
  is 1 a bag.
• Few people know about Biancas Cookies, and she
  maximizes profit by selling 10 bags a day for 5
  a bag.
• Bianca thinks that if she spends 50 a day on
  advertising, she can increase her market share
  and sell 25 bags a day for 5 a bag.
• If Bianca advertises, will her average total cost
  increase or decrease at the quantity produced?

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CHECKPOINT 17.3

• Solution
• If Bianca advertises, her average total cost will
  decrease.
• With no advertising, her average total cost is 5
  a bag (50 a bag 10 bags).
• With advertising, her average total cost is 4.60
  a bag(115 a bag 25 bags).

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CHECKPOINT 17.3

• Practice Problem 3
• Bianca bakes delicious cookies. Her total fixed
  cost is 40 a day, and her average variable cost
  is 1 a bag.
• Few people know about Biancas Cookies, and she
  maximizes profit by selling 10 bags a day for 5
  a bag.
• Bianca thinks that if she spends 50 a day on
  advertising, she can increase her market share
  and sell 25 bags a day for 5 a bag.
• If Bianca advertises, will she continue to sell
  her cookies for 5 a bag or will she raise or
  lower her price?

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CHECKPOINT 17.3

• Solution
• We cant say if Bianca will continue to sell her
  cookies for 5 a bag.
• Her profit-maximizing price will depend on how
  her demand curve shifts when she advertises.
• Advertising costs are fixed costs, so they dont
  change marginal cost, which remains at 1 a bag.
• Bianca will sell the profit-maximizing quantity
  (the quantity at which marginal revenue equals
  marginal cost) for the highest price she can
  charge (read from the demand curve) for the
  quantity produced.

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Study Plan ProblemBianca bakes delicious
cookies TFC is 40 a day, AVC is 1 a bag and
she maximizes profit by selling 10 bags a day for
5 a bag.Bianca thinks that if she spends 50 a
day on advertising, she can sell 25 bags a day
for 5 a bag. If Biancas advertises, at what
price will she sell her cookies?
CHECKPOINT 17.3

1. 5 a bag
2. a price above 5 a bag
3. cannot say if the price will be above, equal to,
   or below 5 a bag, depending on the demand for
   her cookies
4. a price below 5 a bag

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CHECKPOINT 17.3

• In the news
• Purex tackles tough market, using new spin
• Americans like to pour their own laundry
  detergent, but Dial plans to launch Purex
  Complete, a 3-in-1 laundry sheet embedded with
  detergent, fabric softener, and antistatic agents
  and in an easy to use container. Only about 50
  percent of consumers currently use softener and
  antistatic agents (laundry additives). Dial will
  spend 50 million marketing Purex Complete.
• Source Wall Street Journal, April 28, 2009
• Why create a new laundry detergent when there are
  so many? What new spin would you stress in the
  marketing campaign?

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CHECKPOINT 17.3

• Solution
• A new product is developed and launched if the
  marginal benefit from its development exceeds the
  marginal cost of its development.
• Because many consumers seem to find separate
  laundry additives inconvenient, the marketing
  campaign should target these people and stress
  the convenience feature.