Economics
Walden University Managerial Economics Calculations Paper and Excel Sheet

Walden University

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I need an explanation for this Economics question to help me study.

Assignment is attached and please complete by Sunday around this same time please. If you have any questions please reach out to me. Everything is pretty much the same as always.

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There will not be a Livescribe for Unit 6 because the material is so similar to Unit 5. I want to give you a couple of hints that distinguish perfect competition from monopoly. 1. Note that a monopolist will produce where MR=MC. Unlike a competitive firm, the monopolist does not have to set P=MR. 2. The shut-down rule will be the same for the monopolist as it was for a competitive firm. Don't forget that your spreadsheet must include embedded formulas in each cell, or you must submit a document showing your calculations done by hand. Chapter 12 C A L V E R T , After reading this chapter, you will be able to: Managerial Decisions for Firms with Market Power 12.1 Define market power and describe how own-price elasticity, cross-price elasticity, and the Lerner index T are used to measure market power. 12.2 Explain why barriers to entryE are necessary for market power in the long run and discuss the major types of entry barriers. R R 12.4 Find the profit-maximizing input usage for a monopolist. E and output under monopolistic competition. 12.5 Find the profit-maximizing price 12.6 Employ empirically estimatedNor forecasted demand, average variable cost, and marginal cost to calculate profit-maximizing output and price for monopolistic C or monopolistically competitive firms. E 12.3 Find the profit-maximizing output and price for a monopolist. 12.7 Select production levels at multiple plants to minimize the total cost of producing a given total output for a firm. 1 8 or many years, the “premium” brands of coffee at grocery stores sold 5 for prices very close to the prices of generic “value-brands,” and a 9 “coffeehouse” was a roadside establishment serving mostly weary truck drivers. As everyone on the T planet knows, Starbucks Corp. changed the commodity-like nature of coffee by successfully creating “grande” cachet with its S cappuccinos, lattes, and mochas served in Starbucks cafés designed to look like F the coffeehouses in Italy. Although far from being a pure monopolist, Starbucks nonetheless dominated the specialty coffee market for many years. Starbucks 446 tho21901_ch12_446-508.indd 446 8/11/15 5:07 PM C H A P T E R 12   Managerial Decisions for Firms with Market Power   447 market power The ability possessed by all price-setting firms to raise price without losing all sales, which causes the price-setting firm’s demand to be downward-sloping. enjoyed substantial market power, giving it the ability to price its coffee beans and specialty drinks well above costs and to earn impressive profits for many years. Times have now changed for Starbucks, however, as it finds itself surrounded by rivals offering competing coffee products. Companies such as Second Cup, Dunkin’ Donuts, and even M­cDonald’s, attracted by the economic profits in specialty coffees and facing no barriers to entry, have diminished Starbucks’ market power and profitability. Even though some market analysts blame management for opening too many Starbucks coffeehouses worldwide, the greater problem C new firms from entering its profitable niche. As you was the inability to prevent will learn in this chapter,A lasting market power cannot happen without some type of entry barrier. L competitive firms don’t have—makes long-run Market power—something economic profit possible. V All price-setting firms possess market power, which is the ability to raise their prices without losing all their sales.1 In contrast to E firms discussed in Chapter 11, price-setting firms the competitive price-taking do not sell standardized Rcommodities in markets with many other sellers of nearly identical products, and so price-setting firms do not face perfectly elastic T (horizontal) demand curves. Because the product is somehow differentiated from rivals’ products or perhaps , because the geographic market area has only one (or just a few) sellers of the product, firms with market power face downwardsloping demand curves for the products they sell. All firms except price-taking T monopolistic competitors, and ­oligopolies—have competitors—monopolies, some market power. E When firms with market power raise price, even though sales do not fall to zero, sales do, of course,R decrease because of the law of demand. The effect of the change in price on the firm’s R sales depends to a large extent on the amount of its market power, which can differ greatly among firms. Firms with market power E monopolies with a great deal of latitude over the prices range in scope from virtual they charge, such as Amgen’s N Enbrel drug for psoriatic arthritis treatment, to firms with a great deal of competition and only a small amount of market power, such as shoe stores or clothingCstores in a large mall. The primary focus ofEthis chapter is to show how managers of price-setting firms can choose price, output, and input usage in a way that maximizes the firm’s profit. For the types of firms discussed in this chapter—firms possessing market power that can set prices1without worrying too much about retaliatory responses by any rival firms—the profit-maximizing decision is a straightforward application 8 of the MR = MC rule. However, in the next chapter on oligopoly firms, we will 5 arise for oligopoly managers because their demand discuss complications that and marginal revenue conditions depend critically on the decisions of rival firms. 9 T S 1 In other courses or in other textbooks, you may see the terms market power and monopoly power used interchangeably, as if both terms have exactly the same meaning. Strictly speaking, they do not. Throughout this textbook we will always use the term market power, rather than monopoly power, when we refer to the price-setting power allowing firms to raise price without losing all sales. In Chapter 16 we will explain that monopoly power is a legal concept that differs in rather important ways from the economic concept of market power. tho21901_ch12_446-508.indd 447 8/11/15 5:07 PM 448  C H A P T E R 12   Managerial Decisions for Firms with Market Power monopoly A firm that produces a good for which there are no close substitutes in a market that other firms are prevented from entering because of a barrier to entry. monopolistic c­ompetition A market consisting of a large number of firms selling a differentiated product with low barriers to entry. Understanding the complexities of decision making when rivals can undermine planned price changes will require the tools of strategic decision making presented in the next chapter. Thus, for now, you should understand that decision-making rules presented in this chapter will be much simpler than those in Chapter 13 for oligopoly. The reason for this is that the monopolist has no rival firms to worry about and the monopolistically competitive firm faces only relatively small rivals who can be safely ignored for decision-making purposes. The first part of this chapter describes some ways of measuring market power C than terms such as “great deal” or “limited that are more precise and concrete amount.” We then discuss some of Athe determinants of the market power possessed by a firm and reasons why some firms have much more market power than others. L is devoted to the theory of monopoly. A The major portion of the chapter ­monopoly exists when a firm produces and sells a good or service for which there V are no close substitutes and other firms are prevented by some type of entry barE rier from entering the market. A monopoly, consequently, has more market power than any other type of firm. Although there are few true monopolies in real-world R markets—and most of these are subject to some form of government regulation— T many large and small firms possess a considerable amount of market power in , the sense of having few close substitutes for the products they sell. The theory of monopoly provides the basic analytical framework for the analysis of how managers of all price-setting firms with market power can make decisions to maximize T oligopolistic firms that face a high degree of their profit (except, as mentioned, interdependence). E We end this chapter with a fairly brief analysis of firms selling in markets unR der conditions of monopolistic competition. Under monopolistic competition, the market consists of a large number of relatively small firms that produce similar R but slightly differentiated products and therefore have some, but not much, marE is characterized by easy entry into and exit ket power. Monopolistic competition from the market. Most retail andN wholesale firms and many small manufacturers are examples of monopolistic competition. C Certainly, monopoly and monopolistic competition are very different market structures, but firms in both of these market structures possess some degree of E market power. In both cases, managers employ precisely the same analysis to choose the profit-maximizing point on a downward-sloping demand curve. As we will show you in this chapter, there 1 is virtually no difference between monopoly and monopolistic competition in the short run. And even though the outcomes are 8 somewhat different in the long run for the two structures, it is convenient to exam5 kinds of market structures in a single chapter. ine decision making in both of these 9 T Even though we have not set forth S a precise way to measure a firm’s market 12.1 MEASUREMENT OF MARKET POWER power, you have probably figured out that the amount of market power is related to the availability of substitutes. The better the substitutes for the product sold by a firm, the less market power the firm possesses. However, there is no single tho21901_ch12_446-508.indd 448 8/11/15 5:07 PM C H A P T E R 12   Managerial Decisions for Firms with Market Power   449 measurement of market power that is totally acceptable to economists, policymakers, and the courts. Economists have come to rely on several measures of market power. These methods are widely used, frequently in antitrust cases that require objective measurement of market power. Any of the methods of measuring the market power of a firm will fail to provide an accurate measure of market power if the scope of the market in which the firm competes has not been carefully defined. This section begins by discussing how to determine the proper market definition: identifying the products that comC the geographic area in which the competition occurs. pete with one another and Then we discuss some measures of market power. A L V A market definition identifies the producers and products or service types that compete in a particular E geographic area, which is just large enough to include all competing sellers. As Ryou can see by this definition of a market, properly defining a market requires considering the level of competition in both the T product dimension and the geographic dimension of a market. Although the , methodology of appropriately defining a market is primarily of interest to firms Market Definition market definition The identification of the producers and products that compete for consumers in a particular geographic area. engaged in federal or state antitrust litigation—specifically cases involving illegal monopolization of a market or the impact of a proposed merger on the T merged firm’s market power—managers should know how to properly define the firm’s market to measure correctly the firm’s market power. We will now E discuss some guidelines for determining the proper product and geographic ­dimensions of a market.R A properly defined market R should include all the products or services that consumers perceive to be substitutes. A manager who fails to identify all the products E that consumers see as substitutes for the firm’s product will likely overestimate the firm’s market power. The CEO of Coca-Cola would be foolish to view the N company as a monopolist in the production of cola soft drinks and expect it to enjoy substantial marketC power. No doubt Coca-Cola’s syrup formula is a closely guarded secret, but most E soft-drink consumers consider rival brands of soft drinks, as well as a variety of noncarbonated drinks such as iced tea and Gatorade, as reasonable substitutes for Coca-Cola. The geographic boundaries 1 of a market should be just large enough to include all firms whose presence limits the ability of other firms to raise price without 8 a substantial loss of sales. Two statistics provide guidelines for delineating the 5 a market: (1) the percentage of sales to buyers outside geographic dimensions of the market and (2) the percentage of sales from sellers outside the market. Both 9 percentages will be small if the geographic boundary includes all active buyers T and sellers. These two guidelines for determining the geographic dimensions of a market are sometimes S referred to as LIFO and LOFI: little in from outside and little out from inside. As mentioned earlier, economists have developed several measures of market power. We will discuss briefly only a few of the more important measures. tho21901_ch12_446-508.indd 449 8/11/15 5:07 PM 450  C H A P T E R 12   Managerial Decisions for Firms with Market Power Elasticity of Demand One approach to measuring how much market power a firm possesses is to measure the elasticity of the firm’s demand curve. Recall that a firm’s ability to raise price without suffering a substantial reduction in unit sales is inversely related to the price elasticity of demand. The less elastic is demand, the smaller the percentage reduction in quantity demanded associated with any particular price increase. The more elastic is demand, the larger the percentage decrease in unit sales associated with a given increase in price. Also recallCthat the elasticity of demand is greater (i.e., more elastic) the larger the number of substitutes available for a firm’s product. As demand A the product as having fewer good substitutes. becomes less elastic, consumers view Although a firm’s market power L is greater the less elastic its demand, this does not mean a firm with market power chooses to produce on the inelastic portion V power does not imply that a manager proof its demand. In other words, market duces where |E| < 1; rather, theEless elastic is demand, the greater the degree of market power. We will demonstrate later in this chapter that a monopolist always R chooses to produce and sell on the elastic portion of its demand. T Relation The degree to which a firm possesses market power is inversely related to the elasticity of , demand. The less (more) elastic the firm’s demand, the greater (less) its degree of market power. The fewer the number of close substitutes consumers can find for a firm’s product, the less elastic is demand and the greater the firm’s market power. When demand is perfectly elastic (demand is horizontal), the firm possesses T no market power. Lerner index A ratio that measures the proportionate amount by which price exceeds ­marginal cost: ________ ​  P 2 MC  ​ . P E The Lerner Index R A closely related method of measuring R the degree of market power is to measure the extent to which price deviates from the price that would exist under competiE tion. The Lerner index, named for Abba Lerner, who popularized this measure, is a N amount by which price exceeds marginal cost ratio that measures the proportionate C index = ________ Lerner ​ P − MC  ​ P E Price equals marginal cost when firms are price-takers, so the Lerner index equals zero under competition. The higher the value of the Lerner index, the greater the degree of market power. 1 The Lerner index can be related to the price elasticity of demand. In profit8 maximizing equilibrium, marginal cost equals marginal revenue. Also recall from Chapter 6 that MR = P(1 + 1/E).5Thus the Lerner index can be expressed as 9 ______________ P − P(1 + 1/E) 1  ​ Lerner index = ________ ​ P − MR  ​ =    ​   ​ = 1 − (1 + 1/E) = −  ​ __ P P E T In this form, it is easy to seeSthat the less elastic is demand, the higher the L­erner index and the higher the degree of market power. The Lerner index is consistent with this discussion, showing that market power is inversely related to the elasticity of demand. tho21901_ch12_446-508.indd 450 8/11/15 5:07 PM C H A P T E R 12   Managerial Decisions for Firms with Market Power   451 MC , measures the proportionate amount by which price exceeds mar­ The Lerner index,  _________ ​  P − ​ P ginal cost. Under perfect competition, the index is equal to zero, and the index increases in magnitude as market power increases. The Lerner index can be expressed as −1/E, which shows that the index, and market power, vary inversely with the elasticity of demand. The lower (higher) the elasticity of demand, the greater (smaller) the Lerner index and the degree of market power. Relation Cross-Price Elasticity of Demand C An indicator, though not strictly a measure, of market power is the cross-price A elasticity of demand. Cross-price elasticity measures the sensitivity of the quantity purchased of one good to a change in the price of another good. It indicates L whether two goods are viewed by consumers as substitutes. A large, positive V that consumers consider the goods to be readily subcross-price elasticity means stitutable. Market power Ein this case is likely to be weak. If a firm produces a product for which there are no other products with a high (positive) cross-price R to possess a high degree of market power. elasticity, the firm is likely The cross-price elasticity T of demand is often used in antitrust cases to help determine whether consumers of a particular firm’s product perceive other products to be , Using cross-price elasticities, antitrust officials try to desubstitutes for that product. termine which products compete with one another. For example, antitrust officials might wish to determine the degree of market power enjoyed by Nike brand athletic T shoes. Nike Corporation has spent a great deal of money advertising to establish a prominent position in theE market for athletic shoes. To determine which other products compete with Nike, the cross-price elasticity of the quantity demanded of Nike R shoes with respect to a change in the price of a rival’s product can be calculated. UsR antitrust officials can determine whether consumers ing such cross-price elasticities, view Nike as having any E real competitors in the market for athletic shoes. Relation If consumers viewN two goods to be substitutes, the cross-price elasticity of demand (EXY ) is positive. The higher the cross-price elasticity, the greater the perceived substitutability and the smaller the C by the firms producing the two goods. degree of market power possessed E Now try Technical Problem 1. These are only a few of the measures of market power. The courts in antitrust cases and the Justice Department in merger and acquisition hearings sometimes use a combination of measures, including concentration ratios and share of the 1 market. It is also not always clear just how high a cross elasticity or how low an elasticity constitutes “too8much” market power. If you are ever involved in such a hearing, you should be 5 aware of the problems in measuring market power. Illustration 12.1 shows the difficulty of determining what constitutes a market and 9 of market power. what determines the amount 12.2 BARRIERS TO ENTRY T S Entry or potential entry of new firms into a market can erode the market power of existing firms by increasing the number of substitutes. Therefore, as a general case, a firm can possess a high degree of market power only when strong barriers tho21901_ch12_446-508.indd 451 8/11/15 5:07 PM 452  C H A P T E R 12   Managerial Decisions for Firms wit ...
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Attached below is my complete answer for the unit 6 assignment.

Running head: ANSWER TO UNIT 6 ECONOMICS ASSIGNMENT

Answer to Unit 6 Economics Assignment
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Running head: ANSWER TO UNIT 6 ECONOMICS ASSIGNMENT

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Answer to Unit 6 Economics Assignment
Answer to Question 1
The manager of the EI Dorado Star should charge at the price when the marginal
cost (MC) is approximately equal to the marginal revenue (MR), or after that the
marginal cost gets larger than the marginal revenue (Thomas & Maurice, 2013). From the
calculation in Excel spreadsheet, we can observe that when the quantity is 5,000 units,
the marginal revenue of $0.20 is still higher than the marginal cost of $0.18. As the
quantity increases to 6,000 units, its corresponding marginal revenue of $0.18 becomes
smaller than the marginal cost of $0.19. Hence, the price charged by the manager of the
EI Dorado Star should be the marginal cost of $1.19 when the quantity of newspaper sold
is 5,000 units, as the desired result.
Answer to Question 2
The greatest possible amount of total revenue (TR) cannot be given using the
quantity level and the price answered in the previous question. In fact, the highest total
revenue of $6,225 takes place when the quantity is 7,000 units whereas the quantity level
as determined in the previous part is only 5,000 units. Moreover, this is what we have
expected because the total revenue can only be maximized when we obtain zero marginal
revenue, as the profit is highest when the difference between the total revenue and the
total cost is maximized.
Answer to Question 3
The total profit can be calculated as column G in the Excel file by subtracting the
total cost (TC) in column C from the total revenue (TR) in column B. In a respective
manner, the profit margin as column H in the Excel spreadsheet can be computed by

Running head: ANSWER TO UNIT 6 ECONOMICS ASSIGNMENT

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