Prof. Bryan Caplan

bcaplan@gmu.edu

http://www.gmu.edu/departments/economics/bcaplan

Econ 103

Spring, 2000

Gwartney and Stroup:(2-3 sentences)

Chapter 7, Critical Analysis: 11

11.  This all depends on the shape of firms' AC curves.  If the AC curve turns up quickly, large firms will be unable to survive in competition against small firms.  If the AC curve turns up slowly, small firms will be unable to survive in competition against large firms.

Chapter 8, Critical Analysis: 2, 11

2.  This is false.  Monopolies do more than transfer wealth from buyers to sellers.  There are also deadweight costs that arise because monopolies charge prices above marginal cost.

11.  When transportation costs fall, more and more firms become potential (and actual) competitors in every market.  In a small rural town 100 years ago, almost every seller was the ONLY supplier of certain products in the town.  Today, even in a small rural town there are many alternative suppliers  - mail order, for example.  Thus, markets are probably much more competitive than 100 years ago.

1.  A.  \$9999 - GM just undercuts Ford's marginal cost.

B.  GM earns \$1999 per car sold, and sells a positive quantity.  Therefore it's profits are positive.  Ford and Chrysler would both lose money on each car produced if they did produce any (which they won't!).

C.  1 - GM.

D.  Now GM and Ford split the market, and the price is \$10,000.  GM loses \$1999 in profit per car; Ford still makes no profit; consumers pay \$1 more per car.

2.

Lancaster

of York

£1,000,000

£400,000

£500,000

£600,000

£500,000

£1,350,000

£600,000

£750,000

£750,000

£600,000

£2,400,000

£1,200,000

£1,500,000

£1,200,000

£900,000

£2,240,000

£1,280,000

£1,600,000

£960,000

£640,000

£2,040,000

£1,360,000

£1,700,000

£680,000

£340,000

£1,800,000

£1,440,000

£1,800,000

£360,000

£0

£1,520,000

£1,520,000

£1,900,000

£0

-£380,000

£1,200,000

£1,600,000

£2,000,000

-£400,000

-£800,000

4200

£840,000

£1,680,000

£2,100,000

-£840,000

-£1,260,000

A.         Price would be £800; quantity 3000; profits £1,200,000.

B.                 Price would be £800; quantity 3000; profits £900,000.

C.                 Lancaster would win and pay £900,001 - just enough to beat York.