Question Collection
European Competition Policy – Chair of Economic Policy
Question 1: - Perfect Competition
Suppose a perfect competitive market where all firms produce a homogenous good. Assume the
cost function is: 3 2 12.
a) Derive both, the marginal and the average cost function and include them in a price-quantity
diagram.
b) Denominate the final market price and the quantity. Could you explain the concept behind this
solution?
Solution:
a)
∆
6 2
∆
12
3 2 b)
6 2 3 2 12
2
6 ∗ 2 2 14
From a theoretical point of view price has to be equal to marginal cost. But if this happens in
another point than the minimum point of the average costs this will lead either to losses for the firm
or to possibilities for other firms to set lower prices. Therefore in the equilibrium of a perfect
competitive market price has to be equal to marginal cost and to average cost. This is only
possible in the minimum of average costs.
Question 2: - Perfect Competition
Suppose a perfect competitive market where all firms produce a homogenous good. The inverse
demand function is given by 50 ; ∑ and the cost function is .
a) Compute the price and quantities for the market and the single firm.
b) Draw a proper graphic.
c) Compute consumer and producer surplus and social welfare.
Solution:
a)
∗ !
∆
10
∆
1
1 50 49
7
7
b)
c)
#$% $% #$% 49
1
& #$% )$% * 49 #
3
(
1
)$7% )$0% 7* 49 ∗ 7 0
3
114, 33 343 228,67 → /- 0
0123451 - /- 228,67
'
Question 3: - Monopoly
A Monopolist faces the following demand curve:
75 /
4
Establish the equation for the marginal return curve (MR).
Source: Hamilton, Jonathan and Valerie Suslow (2005): Übungen zur Mikroökonomie, , Chapter
10.2.1, Task 2.
Exercise book for:
Pindyck, Robert and Daniel Rubinfeld (2005): Microeconomics, 6th edition, Upper Saddle River,
NJ: Pearson Prentice Hall – available in the library in the 6th and 7th edition.
Solution:
/
4
/
6
6
6
75 300 4
/∗
300 4 300 8
Question 4: - Monopoly
a) A monopolist on a market with the demand curve / 300 4 has constant average variable
costs of 100 and fixed costs of 50. Calculate profit maximizing quantity and price.
b) Now assume fixed costs of 2600. What is the new optimal output quantity?
c) Now assume the cost function: 200 50. Calculate again the profit maximizing quantity.
Source: Hamilton, Jonathan and Valerie Suslow (2005): Übungen zur Mikroökonomie, , Chapter
10.2.1, Task 3.
Exercise book for:
Pindyck, Robert and Daniel Rubinfeld (2005): Microeconomics, 6th edition, Upper Saddle River,
NJ: Pearson Prentice Hall – available in the library in the 6th and 7th edition.
Solution:
a)
$300 4% 100 50
!
∆
200 8 0
∆
∗ 25
→ /∗ 200
200 ∗ 25 100 ∗ 25 50 2450 > 0
b)
200 ∗ 25 100 ∗ 25 2600 100 < 0
∗ 0
The profit maximizing quantity is, in this case, a pure minimization of losses and therefore it would
be better to stop production.
c)
$100 4% 200 50
!
∆
100 8 0
∆
∗ 12.5
→ /∗ 250
250 ∗ 12.5 200 ∗ 12.5 50 575 > 0
Question 5: - Monopoly
Which answer(s) is/are correct?
The Welfare loss in case of monopoly power:
a) is equal to the profits of the monopolist.
b) is equal to the amount of surplus shifted from consumer surplus to producer surplus
c) exists duo to the fact that the monopolist produces less quantity than optimal.
Source: Hamilton, Jonathan and Valerie Suslow (2005): Übungen zur Mikroökonomie, , Chapter
10.4, Task 34.
Exercise book for:
Pindyck, Robert and Daniel Rubinfeld (2005): Microeconomics, 6th edition, Upper Saddle River,
NJ: Pearson Prentice Hall – available in the library in the 6th and 7th edition.
Solution:
c) is correct. This is the definition of welfare loss.
Question 6: - Contestability
One condition for contestability is that established firms do not lower their prices in case of market
entry (possibility for hit-and-run competition). Explain why (or why not) this is a necessary
assumption for the functioning of the contestability approach.
Solution:
If a potential entrant has to assume that the incumbent will lower his price in case of entry this
decreases the incentives to enter the market. The new firm has to pay the cost of entry and is in
this situation not able to set the price to the short-time minimum price (price=variable cost). The
entrant has to set ad least the long-time minimum price (price=average cost) because of the sunk
cost. If the Incumbent is not adjusting his price this is not a problem. Therefore this assumption is
indeed necessary for the success of the contestability approach.
Question 7: - asymmetric Cournot Duopoly
The inverse demand function is given with / 1000 0.1. The marginal costs of firm 1 are 100.
The marginal costs of firm 2 are 190.
a) Derive the reaction function of firm 1.
b) Derive the reaction function of firm 2.
c) Calculate the output quantities as interception point of the reaction functions.
Source: Hamilton, Jonathan and Valerie Suslow (2005): Übungen zur Mikroökonomie, , Chapter
12.2.3, Task 4.
Exercise book for:
Pindyck, Robert and Daniel Rubinfeld (2005): Microeconomics, 6th edition, Upper Saddle River,
NJ: Pearson Prentice Hall – available in the library in the 6th and 7th edition.
Solution:
a)
9 $9 , % :1000 0.1$9 %;9 1009
∆9
900 0.29 0.1
∆9
9 69 $ % 4500 0.5
b)
$ , 9 % :1000 0.1$9 %; 190
∆
810 0.19 0.2
∆
6 $9 % 4050 0.59
c)
9 69 :6 $9 %; 4500 0.5$4050 0.59 %
9 2475 0.259
0.759 2475
9 3300
→ 4050 0.5 ∗ 3300
2400
Question 8: - Cournot Duopoly
Choose the right answer:
In case of homogeneous products the total market quantity of the cournot equilibrium is:
a) as high as the total market quantity in the monopoly case
b) lower as the total market quantity in the monopoly case
c) above the total market quantity in a perfect competitive market
d) between the total market quantities of monopoly and perfect competition
e) no answer is correct
Source: Hamilton, Jonathan and Valerie Suslow (2005): Übungen zur Mikroökonomie, , Chapter
12.4, Task 19.
Exercise book for:
Pindyck, Robert and Daniel Rubinfeld (2005): Microeconomics, 6th edition, Upper Saddle River,
NJ: Pearson Prentice Hall – available in the library in the 6th and 7th edition.
Solution:
d) is correct
Question 9: - Oligopoly
Choose the right answer: To the main characteristics of oligopoly belongs…
a) many small firms
b) low barriers for entry or exit
c) the need to take the behavior of other competitors into account
d) all three answers are correct
e) no answer is correct
Source: Hamilton, Jonathan and Valerie Suslow (2005): Übungen zur Mikroökonomie, , Chapter
12.4, Task 21.
Exercise book for:
Pindyck, Robert and Daniel Rubinfeld (2005): Microeconomics, 6th edition, Upper Saddle River,
NJ: Pearson Prentice Hall – available in the library in the 6th and 7th edition.
Solution:
c) is correct
Question 10: - Monopsony
Explain the calculus of a demander in comparison to a supplier. Explain the demander perspective
to the Supply and Demand curve and differentiate the behaviour of demanders with and without
market power.
Solution:
Suppliers maximize profits: revenue – costs
Demanders maximize utility: value – expenditures, the optimal solution is if marginal value =
marginal expenditures
Demanders interpret the Supply function as average expenditures (since it gives the price they
have to pay per good for a given amount of goods). The decision is made in the intercept between
this curve and the Demand curve which is constituted by the marginal value. Since demanders in
a perfect competitive market have no market power the supply curve is not only average but also
marginal expenditures because the amount of demanded goods has no influence on the price
(price taker assumption). A Demander with market power (like in a monopsony) would be able to
influence the price. Therefore marginal expenditure curve is different from the average expenditure
curve (supply curve). The monopsony actor would set the optimal price lower than in perfect
completion. Duo to a reduction of the amount of traded goods the will be a dead weight loss like in
the monopoly situation.
Question 11: - IO – Models
Compare those types of markets.
Perfect
Competition
number of
firms in the
market
number of
consumers
in the
market
strategic
interdepend
ence
free entry
(and exit)
positive
econ. profits
(long-run)
Oligopoly
Monopolisti
with
c
Homogeneo
Competition
us Goods
Oligopoly
with
Heterogene
ous Goods
Monopoly
Monopsony
Many
Many
Few
Few
One
Many
Many
Many
Many
Many
Many
One
No
No
Yes
Yes
No
No
Yes
Yes
Yes
No
No
No
Yes
No
Yes
Yes
No
Yes
No
Yes
Yes
No
Question 12: - Monopolistic Competition
Choose the correct answer:
If a certain market is characterized as perfect competitive or monopolistic depends on:
a) the existence of barriers to entry
b) the degree of product differentiation
c) the possibility of firms to cooperate with each other
d) a and b are correct
e) all answers are correct
Source: Hamilton, Jonathan and Valerie Suslow (2005): Übungen zur Mikroökonomie, , Chapter
12.4, Task 25,
Exercise book for:
Pindyck, Robert and Daniel Rubinfeld (2005): Microeconomics, 6th edition, Upper Saddle River,
NJ: Pearson Prentice Hall – available in the library in the 6th and 7th edition.
Solution:
Answer b is correct.
Question 13: - Market types
In which type of market the following firms act? Fill in and explain your decision.
Stadtbäckerei Jena (bakery), Deutsche Bank, Mircosoft, Goggle, Facebook, Deutsche Bahn-Regio
(a sub firm of Deutsche Bahn which is engaged in public transfer over middle range), McDonalds
in Jena, Thalia in Jena (bookstore)
Put also the following cases into the table:
A bakery in a village with 600 inhabitants, a furniture shop in a city with 500 000 inhabitants, a
furniture shop in a village with 1000 inhabitants, a bank on the Salomon islands
Monopoly
Oligopoly with
homogeneous
Oligopoly with
heterogeneous
Perfect
Competition
Monopolistic
Competition
Solution: Please notice: important is the argumentation, in most places more than one answer is
possible
Stadtbäckerei Jena: Perfect Competition or Monopolistic Competition
Deutsche Bank: Oligopoly with homogeneous products
Microsoft: it depends on which part of the firm you focus -> Monopoly or Oligopoly with
heterogeneous products
Goggle: not possible to say for the whole firm-> depends on which part of the firm you focus >Monopoly or Oligopoly with homogeneous products but path dependent reputation
Facebook: Monopoly (today but this seems to chance)
Deutsche Bahn-Regio: Monopoly products for a certain transition, for transportation regional at all
oligopoly with homogenous/ heterogeneous products
Mc Donalds in Jena: Oligopoly with heterogeneous products with regards to fast food but
monopolistic competition with regards to restaurant market
Thalia in Jena: Oligopoly with homogenous products
Bakery in little village: monopoly or oligopoly with homo/hetero or perfect
Furniture shop 500000 inhabitants: everything except monopoly could be argued
Furniture shop 1000 inhabitants: monopoly or Oligopoly with homo/hetero depends on distance to
the next village with such a shop
Salomon islands bank: Oligopoly with homogeneous products or Perfect Competition
Question 14: - policy reactions
Imagine the following situations and answering these questions:
•
•
•
How could we describe the market?
What is the underlying problem?
Should competition policy react to this situation?
a) A little village of 300 persons has one bakery.
b) After Apple has introduced the I-Phone it was the only existing smartphone for a certain
time.
c) Before 2013 Germany has only 4 big electricity firms. These firms have been the owners of
the electricity networks too.
d) The Deutsche Post Ag is/was the only firm with the right to transport standard letters or
mails. This was guaranteed by the German Federal Republic.
Solution: The solutions below are only inspiration. With good arguments and explanations you
could argue for different solutions.
a) Depending on the distance to the next village or city and the situation there it could be
Monopoly, Oligopoly or Perfect Competition. The problem is the size of the relevant market and
the existence of fixed costs. Regulation is senseless.
b) This was a temporary Monopoly situation. (If you would argue the relevant market is mobile
telecommunication in principle than it was another situation) Innovation leads to new markets
or changes in demand. Regulation would be harmful because it would destroy innovation
incentives and innovation is important.
c) Oligopoly with homogeneous goods (what’s about green energy shares in the energy mix of
the firm?). Regional monopolies on another market (the network) are transferred to the energy
supply market. Regulation is needed. Price regulation has failed in the past. Better approaches
are needed e.g. separate network and energy supply.
d) Monopoly guaranteed by the state. Problem here is legal barrier to entry. Regulation is the
problem not the solution.
Question 15: - Cartel
Choose the right answer:
A Cartel is more likely to be successful if:
a) the price elasticity of demand is low
b) the cartel members have similar production cost
c) the cartel members produce similar quantities
d) b) and c) are correct
e) all answers are correct
Source: Hamilton, Jonathan and Valerie Suslow (2005): Übungen zur Mikroökonomie, , Chapter
12.4, Task 23.
Exercise book for:
Pindyck, Robert and Daniel Rubinfeld (2005): Microeconomics, 6th edition, Upper Saddle River,
NJ: Pearson Prentice Hall – available in the library in the 6th and 7th edition.
Solution:
Answer e) is correct.
Question 16: -Types of Cartels
Different types of cartels are treated unequally. For examples price cartels are prohibited and
norm cartels are allowed. In your opinion: should research cartels are allowed or prohibited.
Discuss!
Solution:
There is no clear solution for a discussion question but here are some ideas:
•
•
•
Decision should be different for strong/ big firms than for small firms (market power)
Reduce protection time or forcing to publish results earlier for a cartel of powerful firms
Obligation to include small competitors in the cartel
Question 17: - Strategies to restrict Competition
There are three different types of strategies that restrict competition. Each of these strategies
contains different types of actions and has very special problems.
Take the following example: One strategy to restrict competition is the Concentration strategy.
One tool of this strategy is the horizontal merger. The aim of using such a tool is to achieve a
higher market share. The problem is that also market power of the new firm increases.
Please name one other strategy, a possible tool of this strategy and explain this tool by the help of
two additional facts like aim, problem, examples or general idea, as done in the example.
Solution:
There are many possible answers. To get an impression: three additional examples.
Negotiation strategy -> Cartel ->Agreement between legal independent firms/ price and quantity
Cartel always prohibited
Negotiation strategy -> vertical price fixture -> autonomous enterprises on upstream/downstream
markets/ example: book trade
Hindrance strategy -> exclusivity and bundling -> typically between distributers and consumers/
often used in automobile industry