# Market Structure and Profit Maximization

Section 1: Explicit and Implicit Costs and Cost Minimizing Output

1. Pat’s Pizza Restaurant owner incurs various economic costs of production. Explain whether each of the following is an explicit cost or an implicit cost. Which of the two costs should Pat minimize to maximize his account profit?
a) Payments for rented manufacturing equipment.
b) A firm’s use of a warehouse that it owns and could rent to another firm.
c) Wages paid to the firm’s workers.
d) The wages the firm’s owner could earn if he/she worked for another company.
2. Consider the following information in the table for Pat’s Pizza Restaurant and answer the questions below by using the cost minimization rule that takes into account the marginal product per dollar of inputs of production.
Item Cost
Marginal Product of Capital 4,000
Marginal Product of Labor 100
Wage Rate \$10
Rental Price of Pizza Ovens \$500

a) Is the owner of Pat’s Pizza Restaurant minimizing costs? Explain by computing marginal productivity per dollar using the data in the table.
b) Should he rent more ovens and hire fewer workers or rent fewer ovens and hire more workers to increase productivity and lower costs of production? Explain.

1. Your answer must consist of a 450–500 word expository research essay.
Consider Pat’s Pizza Restaurant’s production decision in both the short-run and long-run. Pat wants to improve the productivity of the firm in the long-run. Explain the types of input costs that might be fixed in the short-run and types of costs that may be variable in the long-run. Provide examples for fixed inputs and variable inputs, as well as fixed costs and variable costs for the restaurant in the short-run. What long-run economic decisions should Pat make to increase productivity, minimize costs, and maximize profit?

Section 2: Perfectly Competitive and Monopoly Firms

1. How does the demand curve faced by a perfectly competitive firm differ from the market demand curve in a perfectly competitive market? Explain.
2. How does the profit maximization condition for a monopoly differ from that for a perfectly competitive firm? How does this difference impact efficiency under each market structure? Explain.
3. The following table provides market share information about the soft-drink industry. Review antitrust laws and the merger guidelines under Chapter 15: “Monopoly and Antitrust Policy” and conduct your own research on U.S. antitrust laws in the Online Library or the internet to answer the following questions.

Company Market Share
Coca-Cola 37%
Pepsi-Co 35%
Other 11%

a. Compute the Herfindahl-Hirschman Index (HHI) market concentration rules that guide mergers between companies to prevent monopoly creation and to promote competition among firms. Based on the market shares of the companies in the table, the merger of which companies will be highly concentrated? What ethical rules will be affected based on U.S. antitrust laws and merger guidelines in regard to a highly concentrated market?

b. Do you think the Department of Justice and the Federal Trade Commission would approve a merger between any two of the first three companies listed in the table based U.S. merger guidelines and antitrust laws? Explain.

c. Do you think this market has barriers to entry? If yes, what might be the market barriers?

Section 3: Oligopoly and Monopolistically Competitive Firms

1. Do the firms in an oligopoly act independently or interdependently? Explain your answer.
2. A perfectly competitive firm has the following fixed and variable costs in the short run. The market price for the firm’s product is \$140.

Output FC VC TC TR Profit/Loss
0 \$80 \$0 _ 1 80 90
2 80 170
3 80 290
4 80 430
5 80 590
6 80 770
__
a. Complete the table.

b. What level of output should the firm produce to maximize profits?

c. Assume this firm is making a loss when it produces its 7th unit of output. What should the firm do in the short-run? Should it operate at loss or shutdown in the short run?

1. A monopolistically competitive firm has the following demand and cost structure in the short-run. Output Price FC VC TC TR Profit/Loss
0 \$90 \$30 \$0 _
1 80 40 _

2 70 _ 80
3 60 140
4 50 220
5 40 320
6 30 440
7 20 580 _

a. Complete the table.

b. What level of output maximizes profit or minimizes loss?

c. Should this firm operate or shut down in the short-run? Why?

Section 4: Dominant Strategy and Nash Equilibrium
Suppose that Wal-World and Tarbo are independently deciding whether to implement a new bar code technology or use the existing barcode. It is less costly for their suppliers to use one system and the following payoff matrix shows the profits per year for each company resulting from the interaction of their strategies.

(Description of the graph: The payoff matrix shows two oligopoly companies: Wal-World and Tarbo, which are competing to increase their market share and payoffs. They have two strategies, which are playing existing bar code and new bar code. The two companies get different payoffs when they play different strategies.)

a. Does Wal-World have a dominant strategy? Briefly explain.

b. Does Tarbo have a dominant strategy? Briefly explain.

c. Is there a Nash Equilibrium in this game? Briefly explain.
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