LOVELY PROFESSIONAL UNIVERSITY Form/LPUO/AP-3

(The format to be used for Planning the academic activities other than Lecturers/Tutorial/Practical like
Assignments, Case study, Presentation, Quiz, Projects, Class tests, industrial visits, teaching practice, court visits etc. to be
undertaken as a part of the continuous assessment for the Course)
Home-Work 3
School : LIM Department of Management
Name of the faculty member :
Course No. ECO515 Course Title: Managerial Economics
Class: MBA Semester I Section: Batch 2010-12
Max. Marks: 15 Date of Allotment: 19-10-10 Date of Submission: 29-10-10

S. no. Roll No. Topic Objectives of Academic Topic Evaluation Details

No. Activity
Each To make the students Each student will attempt all the
student questions given in the assignment i.e.
will understood of basic managerial 12 questions for each student. A test
attempt all will be conducted after submission
the economic concepts and how of assignment. Submission will
questions. be of 5 marks AND Test of 10
these concepts are applied in
marks. But only those students will
economic decision making in be allowed to sit in test those who
will submit their assignments.
present day economy (Submission means assignment
uploaded on UMS). 2 questions will
asked in test out of the 13 questions
of assignment and evaluations will be
done out of 15 marks. From
submitted assignment 2 questions
will be selected randomly for
evaluation and both will be of 2.5
marks

Date: Sign. of Faculty member

Remarks by HOD (Mandatory)

Sig. of HOD with date

Remarks by HOS (Mandatory)

Sig. of HOS with date

1
 ECO515-Mangerial Economics
HW-3
Note: No assignment shall be catered after the date of submission.
S.no. Topic No.

1 Comment on the following statements ,giving logical reasoning-

a) The cross-elasticity of demand between the product of the monopolist and the product of any
other producer must be very high.
b) In case of monopoly, the marginal revenue is less than the price
c)In the short-run, a monopolist cannot be in equilibrium if MC cuts the MR curve from below,
even if MC=MR
d) Monopoly represents an inefficient use of resources at the macro level

2 Draw a diagram depicting loss to a competitive firm in the short period. Also compare the social benefits under
monopoly and perfect competition with a diagram.
3 Consider the following table and locate the profit maximizing level of output. Also
estimate the “degree of monopoly” corresponding to that level of output

Output Price Average Cost

1 5 3

2 4 3

3 3 3

4 2 3

5 1 3

4 Comment on the following statement with logical reasoning:

A firm in the long-run under monopolistic competition earns only normal profits like that in perfect
competition but only the price is higher and output lower.

5 The kink demand curve theory explains why a price once determined would remain sticky but
does not determine that price level. Comment.

6 Comment on the following statements with logical reasoning and appropriate diagrams.
a) In oligopoly, there is no one single determinate solution, but a number of determinate solutions
depending upon different assumptions.
b) The success of price leadership of a firm depends upon the correctness of his estimates
about the reactions of his followers
2
7 A city has only one furniture store. Is it likely that the store could successfully practice price
discrimination? Why or why not?

8 Is persistent dumping beneficial for the country? Why do countries resort to dumping?
9 “Classification of markets is based on their characteristics.” Substantiate this statement with reference
to Monopoly and Oligopoly market structures.
10 McDonalds is a leading fast food chain giant of USA enjoying international market also. If it is
charging high price at home and low price in foreign market, it is practicising price-discrimination. If
McDonalds is enjoying monopoly at home, then how it will determine price and output for domestic
and foreign market? Explain and Draw a suitable diagram also
11 It is said that a monopolist has full control over output and price .In spite of that why does even a monopolist
firm have to depend upon the demand curve for price determination?
12 Grocery stores and gasoline stations in a large city would appear to be examples of competitive markets .There
are numerous relatively small sellers, each seller is a price taker and products are quite similar.
a) How could we argue that these markets are not competitive?
b) Could each firm face a demand curve that is not perfectly elastic?

Q1.a.Ans. This statement is false because in the monopoly there is no other producer or seller can enter due
to some legal and other factor.And there are no proper substitute of products or services as we know for the
cross elasticity of demand there must be proper substitute of product or services. So, this statement is not
true in case of monopoly.

3
Q1.b.Ans. . In case of monopoly the monopolist has to lower the price of the all unit of its product, if it
wants to sell an additional unit. As such the addition to revenue resulting from selling this additional unit
would be less than the price the firm would receive for this unit. Now this addition to revenue is nothing but
marginal revenue. Hence for a monopolist MR is less than price and MR curve would lie below AR curve.

Q1.c.Ans.In the short run for a monopolist firm MC=MR and MC cuts MR from below it will be in
equilibrium.This is because MC cuts MR from below & MC =MR that point is called equilibrium point or
point where profit is maximum.This is possible in all the market condition.

Q1.d.Ans. Firm in perfect competition is able to efficiently allocate its resources by maximizing producers
and consumer surplus though a monopolist and monopolistically competitive firm operates at less than
optimum output and charges a higher price so we consider a monopolistically competitive firms to be in
sufficient and monopoly practices are not regarded as good economy

Q2.Ans. Losses in the short period.

4
 Price MC
AC

A B
AR=MR=P
P* E

O
Q* Quantity X

PERFECT COMPETITION

MC
AC
A B
Price
Revenue P1 C
Cost

AR
MR

Q1 Quantity

MONOPOLY

X ME
AC
5
 A B

PE

E
AR

MR

O
X

MONOPOLISTIC COMPETITION

SOCIAL BENEFITS UNDER MONOPOLY AND PERFECT COMPETITION.

 Perfectly competitive firm allows maximum consumer surplus (PCDB) .

 Monopoly takes away PCPMAE from consumers to the firm.
 AEB is neither part of firm’s income nor of consumer surplus; hence is the deadweight loss
or economic inefficiency due to monopoly.

Pm A

Pc E B MC=AC=(MRp=Arp)

MRm ARm

Qm Qc Quantity

Q3.Ans.

OUTPU PRICE AVERAG TOTAL MARGINAL TOTAL MARGINAL AVERAGE

T E COST COST REVEN REVENUE REVENUE
COST UE

6
 1 5 3 3 3 5 5 5

2 4 3 6 3 8 3 4

3 3 3 9 3 9 1 3

4 2 3 12 3 8 -1 2

5 1 3 15 3 5 -3 1

Price ,cost,revenue

Profit maximising ME=AC

Level of output

AR

MR
O X
Q

Q 4 Ans.. In long run monopolistic competition the same situation would exist as in perfect competition, in
other words all the firms would earn normal profits. If any firm is earning supernormal profit, this would
attract new firms to enter the industry in long run. This is nothing but added competition, and would result in

7
a shift in the original demand curve and MR curve of the firm downwards which signifies a decrease in
market share of the original firm means decrease in demand for its product. That’s why output is lower
because demand is less.

cost curve

price
revenue EMC
cost Pmc EPC
Ppc DPC

DMC

x
0 Q1 Q2

NOTE-
Pmc(price in monopolistic competition)

Ppc(price in perfect competition)

DMC(demand curve in monopolistic competition)

DPC(demand curve in perfect competition)

Q5.Ans.

Kinked demand curve explains the price stickness of a firm. It is based on two assumptions:-
8
 (A) When one seller increases the price ,the other competitor will not increase the price
(B) When one firm decrease its price the other will also decrease the price.

If firms face such demand curves, the price, p*, is profit maximizing for any marginal cost curve (MC) that
cuts the vertical section of the marginal revenue curve (MR). For example, p* is the profit-maximizing price
for both MC1 and MC2 in Figure 6.1. The kinked demand theory of oligopoly behavior predicts that prices
are likely to remain unchanged for small changes in costs.

Unfortunately, this theory is silent on how price is initially set and, hence, does not explain price levels. At
best, it explains why price does not change in response to moderate shifts in cost. In response to large shifts
in cost, the theory predicts that price should change, although it provides no guidelines as to how the new
price level is set.

Q6.Ans.

9
In oligopoly we have iivalndeterminate demand curve .there can be two demand curve one can be highly
elastic and other can be less elastic .there can be two assumption basically in accordance with the increase
price of product by one firm:-

(1)Rival firm may increase the price

(2)Rival firm may not react to change in price.

Y Y

Price price,cost
P revenue
cost p
revenue
P* P*
D1 D2

O X
Q Q* Quantity X
Q Q* Quantity

VARIATION IN DEMAND DUE TO DIFFERENT ASSUMPTION

Q.(6) (B)Ans.. In this The success of price leadership of a firm depends upon the correctness of his
estimates about the reactions of his followers because in oligopoly the firms are interdependent of each
other. If one increases its price and others do not increase their price then it would be failure for the
firm because the customer will switch to their competitive products. On the other hand if one is
increasing its price and others are also increasing the price then it will be a success of the firm.

Q.7.Ans.YES the furniture shop can discriminate the price because the shop has the monopoly and a
monopolist can discriminate the price. Since there is no substitute for the furniture. So the customers has to
pay the price whatever is been charged. And the monopolist will enjoy the benefit of price discrimination.

10
Q8.Ans..Dumping can harm the domestic industry by reducing its sales volume and market shares, as well
as its sales prices .this in turn can result in decline in profitability, job losses and, in the worst cases ,in the
domestic industry going out of business
Dumping is considered to be an unfair trade practice and, as such, is prohibited under many national trade
laws.

Q.(9). Monopoly means single seller.and there is no close substitute. The monopolist is a price maker.
The characteristics are as follows:-

 Single seller: In a monopoly there is one seller of the monopolised good who produces all the
output. Therefore, the whole market is being served by a single firm, and for practical purposes, the firm
is the same as the industry.
 Market power: Market power is the ability to affect the terms and conditions of exchange so that the
price of the product is set by the firm (price is not imposed by the market as in perfect
competition). Although a monopoly's market power is high it is still limited by the demand side of the
market. A monopoly faces a negatively sloped demand curve not a perfectly inelastic curve.
Consequently, any price increase will result in the loss of some customers.

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers
(oligopolists).
 Profit maximization conditions: An oligopoly maximizes profits by producing where marginal
revenue equals marginal costs.

 Ability to set price: Oligopolies are price setters rather than price takers.

 Entry and exit: Barriers to entry are high. The most important barriers are economies of scale,
patents, access to expensive and complex technology, and strategic actions by incumbent firms
designed to discourage or destroy nascent firms.

 Number of firms: "Few" – a "handful" of sellers. There are so few firms that the actions of one firm
can influence the actions of the other firms.

 Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent
sideline firms from entering market to capture excess profits.

 Product differentiation: Product may be standardized (steel) or differentiated (automobiles).

 Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of various
economic actors can be generally described as selective. Oligopolies have perfect knowledge of their
own cost and demand functions but their inter-firm information may be incomplete. Buyers have
only imperfect knowledge as to price, cost and product quality.

 Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies are

typically composed of a few large firms. Each firm is so large that its actions affect market
conditions. Therefore the competing firms will be aware of a firm's market actions and will respond
11
 appropriately. This means that in contemplating a market action, a firm must take into consideration
the possible reactions of all competing firms and the firm's countermoves.

Q10.Ans.`

Q 11.Ans.The demand curve of the monopolist is highly price inelastic because there are no close substitutes
and consumers have no or very little choice. Hence if consumers want to want to consume the product ,they
would have to buy it at the price charged by the monopolist .this imply that monopoly price will very high
to a large extent but but not always, monopoly firm is also governed by market demand for product and the
forces affecting the demand also affects the monopoly pricing. At the same time demand curve for a
monopoly firm is not perfectly inelastic because pure monopoly does not exist in real life. Hence it faces a
normal downward sloping curve. The bottom line is thus clear, the monopolist cannot set both price and
quantity at its own will.

Q12.Ans. (a) The market is not competitive because there is only two seller in the market and for
competitive market there must be more than two sellers. So it is duopoly.

(b). no each firm cant face such demand curve

12