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Chapter 6: Market Structure
UNITED AIRLINES
Discussion Question Answer:
This fact does not necessarily imply that United should discontinue these flights. Some of the
costs that are being included under the “costs associated with running the hub at the two airports”
may be fixed costs that would be incurred even if United were to cancel its SF to DC flights.
United likely has many other routes that it flies from these two hubs. The decision of whether to
continue the flights should rest on whether the incremental revenue from the route covers the
PRICING AND INVESTMENT DECISIONS
Discussion Question Answers:
1. The optimal quantity is found by setting marginal revenue (101 - .00004Q) equal to marginal
cost ($1) and solving for Q. Q* = 2,500,000. The optimal price is found by inserting the optimal
2. The production constraint does not allow you to go to the profit maximizing output level. You
3. You are making $45,000,000 less profit because of the production constraint. On the surface it
appears that the $30,000,000 investment is worth undertaking so that you can make the full
$125,000,000 in the future. You, however, should think very carefully before making this
investment. You have monopoly power today, but will you have the same market power in two
years? Other drug companies have strong incentives to develop a competing drug given your
high profits. Do they face significant barriers that will prevent them from doing so in the next
An important point of this application is that the forces of competition are strong and no
monopoly power lasts forever. Abnormal profits are a strong incentive for other companies to
ENTRY DECISION
Discussion Question Answers:
1. Given that your competitor is producing 50 units, you face a demand curve of P = 50 – Q
(Note: this equation is derived by substituting 50 into equation 6.6. The market price is $50 if
you produce nothing and declines a dollar for each unit you produce). Your optimal output if
you choose to enter is found by setting marginal revenue equal to marginal cost: 50-2Q = 0; Q*
2. In the simultaneous game each firm made profits of $1,110.89. With an investment of $1,000,
the profit would have been $110.89. In sequential competition your competitor who moved first
