1) Budweiser (now owned by a Belgium based beer company called InBev), Miller and Coors who together produce 85% of all beer consumed in the US, each spend well over $250 million a year on television advertising campaigns, promoting their beer brands. Obviously, if one firm is advertising its brands heavily, the others must also advertise to defend their market shares.
Do you think these firms would welcome congressional legislation which restricted the amount that any one firm could spend on advertising to $1 million yearly, and thereby allowed them all to drastically reduce their costs without fear of losing ground to each other? Are wireless telephone companies in the US market conducting the same practice of non-price competition? Explain your answer in both cases. 5pts.
2) ”Most commercial fish species in nearly every ocean and sea are being rapidly depleted in what marine biologists and other specialists warn is evolving into one of the worst ecological disasters of modern times. According to the United Nations, the world’s 15 million fishermen and 23 million tons of fishing vessels represent twice as much fishing power as major stocks of fish can sustain.”
Assume that ocean fishing resembles a competitive market in the following ways…there are no significant barriers to entry and there are enough individual fishermen so that none of them can affect the market price of fish.
a) Explain why competitive markets normally lead profit maximizing firms to make choices about resource use that lead to an "efficient" allocation of resources to the market? 4 pts
b) If unregulated competitive markets promote "efficient" patterns of resource use, why has unregulated competition led to such serious over allocation of resources to fishing? 4 pts
3) Suppose that the governmental authorities wished to decrease use of a pesticide that is leaching into groundwater supplies in a watershed by 60% from current use levels. Discuss the advantages and/or disadvantages of distributing marketable pesticide permits to each farm operating in the watershed equal to 40% of its current level of use of that pesticide, versus simply ordering each farm to reduce pesticide use to 40% of current levels under threat of heavy fines for non-compliance. 5pts
4) Discuss the following excerpt from a recent story in the Wall Street Journal. In your discussion demonstrate that you can use the concepts of: "price discrimination," and "barriers to entry" to explain: A) the current success of Harrah's strategy; and, B) the prospects for continued success with the strategy. 6 pts
TUNICA, Miss. -- She doesn't know it, but Linda Maranees is the subject of a behavioral experiment that could change the odds of the gambling business. The Memphis, Tenn., retiree, her blouse bedecked with sequined cards and dice, has just received invitations to two nearby slot tournaments, along with vouchers for $200, all courtesy of Harrah's Entertainment Inc.
"Harrah's is savvy," says Ms. Maranees, who admits that once in the casino door, she is bound to spend much more than what Harrah's has given her. That is exactly what the Las Vegas-based company is banking on. Over the past two years, Harrah's has quietly conducted thousands of clinical-style trials to determine what gets people to gamble more. Based on its findings, Harrah's has developed closely guarded marketing strategies tailored individually to the millions of low-rollers who make up its bread-and-butter business.
The results are impressive enough that other casino companies are copying some of Harrah's more discernible methods.
At the center of Harrah's strategy is a former Harvard professor named Gary Loveman and a vast mathematical model much like the ones that airlines use to fill seats with the highest-paying fliers. But this one scores gamblers on how profitable they can be to Harrah's. Richard Mirman, the company senior vice president who refined the model, boasts that it is Harrah's "secret recipe" -- on a par with the famous unrevealed formula of Kentucky Fried Chicken. The model tells Harrah's marketers how to appeal to gamblers such as Ms. Maranees, based on data tracking their previous behavior in casinos. Spitting out "behavior modification reports," Harrah's computers suggest that Ms. Maranees -- an avid slot-tournament player -- will respond best to a cash offer, while Tina Montgomery, a real-estate agent from nearby Oxford, Miss., is better motivated by a free hotel room. As Ms. Montgomery gambles downstairs, she explains, "my husband stays in the room."
5) Assume the graph below represents the market demand for a patented prescription drug together with the long run marginal cost and average cost functions for producing the drug. (note: the diagram assumes that at output levels over 50 million AFC ~ 0, and MC is constant so that ATC = AVC =MC = $20)
A) Draw the marginal revenue function for this firm. 2 pts
B) What is the profit-maximizing price for this firm? 3 pts
C) On the graph show the area which represents the net loss to society resulting from the monopoly power conferred by the patent. 3pts
D) What do you predict will happen to the structure of competition and to the price in this market when the patent expires? (Hint: use the concept of "Minimum efficient scale " of production in your answer.) 4pts.
20 MC & ATC
40 80 120 160 200 PRESCRIPTIONS/YEAR (MILLIONS)
6) Testifying at a price fixing trial involving Cargill Corp. and the market for chicken growth hormone, (in which the Cargill is one of only three firms worldwide), an executive for Perdue said: "It's an oligopoly. When one (firm) changes price, they all do…Usually within minutes."
Why is it not surprising to find that in an oligopoly, which sells a basically undifferentiated product like chicken growth hormone all the firms change prices simultaneously, even if there is no explicit price fixing? 4pts.