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Brewers
Market
share
Before
merger
After
merger
AB InBev
21%
29%
SABMiller
10
—
Heineken
9
11
Carlsberg
6
6
China Resource
Brewery Ltd.
6
6
Tsingtao Brewery
Group
4
4
Molson-Coors
3
4
Yanjing
3
3
Kirin
2
2
BGI/Groupe Castel
2
2
a. Using the table, calculate the HHI for the global beer market both before and after the
merger.
b. Based on the HHI calculated in part a, how has the market structure for the global beer
industry changed?
Solution 10
Question 11
11. Use the three conditions for monopolistic competition discussed in the chapter to decide
which of the following firms are likely to be operating as monopolistic competitors. If they
are not monopolistically competitive firms, are they monopolists, oligopolists, or perfectly
competitive firms?
a. A local band that plays for weddings, parties, and so on
b. Minute Maid, a producer of individual-serving juice boxes
c. Your local dry cleaner
d. A farmer who produces soybeans
Solution 11
Question 12
12. You are thinking of setting up a coffee shop. The market structure for coffee shops is
monopolistic competition. There are three Starbucks shops and two other coffee shops very
much like Starbucks in your town already. In order for you to have some degree of market
power, you may want to differentiate your coffee shop. Thinking about the three different
ways in which products can be differentiated, explain how you would decide whether you
should copy Starbucks or whether you should sell coffee in a completely different way.
Solution 12
Question 13
13. “In the long run, there is no difference between monopolistic competition and perfect
competition.” Discuss whether this statement is true, false, or ambiguous with respect to the
following criteria.
a. The price charged to consumers
b. The average total cost of production
c. The efficiency of the market outcome
d. The typical firm’s profit in the long run
Solution 13
Question 14
14. “In both the short run and in the long run, the typical firm in monopolistic competition and a
monopolist each make a profit.” Do you agree with this statement? Explain your reasoning.
Solution 14
Question 15
15. The market for clothes has the structure of monopolistic competition. What impact will
fewer firms in this industry have on you as a consumer? Address the following issues.
a. Variety of clothes
b. Differences in quality of service
c. Price
Solution 15
Question 16
16. For each of the following situations, decide whether advertising is directly informative about
the product or simply an indirect signal of its quality. Explain your reasoning.
a. Football great Peyton Manning drives a Buick in a TV commercial and claims that he
prefers it to any other car.
b. A Craigslist ad states, “For sale: 1999 Honda Civic, 160,000 miles, new transmission.”
c. McDonald’s spends millions of dollars on an advertising campaign that proclaims: “I’m
lovin’ it.”
d. Subway advertises one of its sandwiches by claiming that it contains 6 grams of fat and
fewer than 300 calories.
Solution 16
Question 17
17. In each of the following cases, explain how the advertisement functions as a signal to a
potential buyer. Explain what information the buyer lacks that is being supplied by the
advertisement and how the information supplied by the advertisement is likely to affect the
buyer’s willingness to buy the good.
a. “Looking for work. Excellent references from previous employers available.”
b. “Electronic equipment for sale. All merchandise carries a one-year, no-questions-asked
warranty.”
c. “Car for sale by original owner. All repair and maintenance records available.”
Solution 17
Question 18
18. The accompanying table shows the Herfindahl–Hirschman Index (HHI) for the restaurant,
cereal, movie studio, and laundry detergent industries as well as the advertising expenditures
of the top 10 firms in each industry. Use the information in the table to answer the following
questions.
Industry
HHI
Advertising expenditures (millions)
Restaurants
179
$1,784
Cereal
2,598
732
Movie studios
918
3,324
Laundry detergent
2,750
132
a. Which market structure—oligopoly or monopolistic competition—best characterizes each
of the industries?
b. Based on your answer to part a, which type of market structure has higher advertising
expenditures? Use the characteristics of each market structure to explain why this
relationship might exist.
Solution 18
Question 19
19. McDonald’s spends millions of dollars each year on legal protection of its brand name,
thereby preventing any unauthorized use of it. Explain what information this conveys to you
as a consumer about the quality of McDonald’s products.
Solution 19
Question 20
Work It Out Interactive step-by-step help with solving these problems can be found online.
20. Let’s revisit the fisheries agreement introduced in Problem 4 stating that to preserve the
North Atlantic fish stocks, it is decided that only two fishing fleets, one from the United
States (U.S.) and the other from the European Union (EU), can fish in those waters. The
accompanying table shows the market demand schedule per week for fish from these waters.
The only costs are fixed costs, so fishing fleets maximize profit by maximizing revenue.
Price of fish (per
pound)
Quantity of fish
demanded (pounds)
$17
1,800
16
2,000
15
2,100
14
2,200
12
2,300
a. If both fishing fleets collude, what is the revenue-maximizing output for the North Atlantic
fishery? What price will a pound of fish sell for?
b. If both fishing fleets collude and share the output equally, what is the revenue to the EU
fleet? To the U.S. fleet?
c. Suppose the EU fleet cheats by expanding its own catch by 100 pounds per week. The U.S.
fleet doesn’t change its catch. What is the revenue to the U.S. fleet? To the EU fleet?
d. In retaliation for the cheating by the EU fleet, the U.S. fleet also expands its catch by 100
pounds per week. What is the revenue to the U.S. fleet? To the EU fleet?.
Solution 20
Question 21
21. The restaurant business in town is a monopolistically competitive industry in long-run
equilibrium. One restaurant owner asks for your advice. She tells you that, each night, not all
tables in her restaurant are full. She also tells you that she would attract more customers if
she lowered the prices on her menu and that doing so would lower her average total cost.
Should she lower her prices? Draw a diagram showing the demand curve, marginal revenue
curve, marginal cost curve, and average total cost curve for this restaurant to explain your
advice. Show in your diagram what would happen to the restaurant owner’s profit if she were
to lower the price so that she sells the minimum-cost output.
Solution 21
