Reference no: EM132339097
Case Study: Market Power
Please address the following case study relating to the alcoholic beverage service industry (bars) in a small town. This case study relates to Chapter 12 of the textbook.
Note: There are videos of hand-worked problems to accompany section 2 and section 3 but not section 1 because the questions in section 1 follow from the reading.
Please submit your work as a single Word document. When I request calculations, you can write them by hand and incorporate a photograph into the document or you can type up the calculations in the document. Similarly, you can create any tables by hand, in Word, or other ways, but your tables should be clear. The document should be approximately 2-4 pages (counting each side of the paper as a page) in length. Please indicate in some way which part of the document responds to each question. The assignment will be graded based on correctness, effort, and presentation.
Section 1. Market Power
a) Identify the most important source(s) of market power in the following markets and briefly explain your answers:
i. Small town bars with liquor licenses
ii. Apple iPad
iii. Electronic commerce (Amazon)
iv. Brand-name prescription drugs
v. Netflix
b) Calculate the Lerner Index for the following profit maximizing firms:
i. Netflix: price = 10, marginal cost = 4
ii. Shell gasoline: elasticity = 0.6
c) Provide an example cross price elasticity for the following products and briefly justify your answer:
i. The price of Apple iPhone X and the quantity of Samsung Galaxy S10
ii. The price of BP gasoline and the quantity of Ford Expedition SUV's
iii. The price of Starbuck's latte's and the quantity of Nike shoes
Section 2. Monopoly (pages 462-475, also consider pages 480-488)
For the purposes of this problem, the quantity produced (Q) will be measured in units of hundreds of customers per month. Prices and costs will be measured in "dollars per drinker". "Dollars per drinker" is a measure of the price (or cost) for the mixture of beer, cocktails, and hard alcohol consumed by an average patron on an average night. Note that the units do not affect your method of solving the profit-maximization problem as long as
the units are consistent. However, you should convert the quantities and prices back to single drinkers and dollars at the end.
There is a single liquor license for a small town held by a bar. The bar faces the demand curve:
and has the cost function:
Q = 30 - 0.5p
C = Q2 + 6Q + 48
a) Solve the monopolists' problem (finding optimal quantity, price, and profit) with output as the choice variable and setting marginal revenue equal to marginal cost.
b) Solve the monopolists' problem (finding optimal quantity, price, and profit) with output as the choice variable and setting marginal profit equal to zero.
c) Solve the monopolists' problem (finding optimal quantity, price, and profit) with price as the choice variable and setting marginal profit equal to zero.
d) Graph the monopolists' problem indicating demand, marginal revenue, marginal cost, average total cost, optimal output, optimal price, and profit.
Section 3. Monopolistic Competition (pages 476-480)
Now let's consider our bar in the long-run if the town removes the need for service establishments to have a liquor license in order to serve alcoholic beverages. In the long- run, this moves the alcohol service industry into monopolist competition.
Graph long-run equilibrium in this monopolistically competitive market. (You do not need to precisely calculate the locations of the curves, but you need to get the general picture correct.) Be sure to identify the average cost curve, marginal cost curve, demand curve, and marginal revenue curve. Also, identify the profit maximizing output and price and any resulting profits.