Analyze the production decision in profit maximization for the four primary market structures.

Apply ethical reasoning to ethical issues within your field of study.

There are four parts to this Assessment. This Assessment presents scenarios where you are required to answer in a combination of short paragraph answers, computations, and completion of 450–500 word expository research essays.

Directions

Using MS Word® to answer the following questions based on the situation.

Part 1: Explicit and Implicit Costs and Cost Minimizing Output

1. The owner of Chloe’s Restaurant incurs various economic costs of production. Explain whether each of the following is an explicit cost or an implicit cost. Which of the two types of costs (explicit or implicit) should Chloe’s Restaurant minimize in order to maximize the account profit?
   1. Payments for rented manufacturing equipment.
   2. A firm’s use of a warehouse that it owns and could rent to another firm.
   3. Wages paid to the firm’s workers.
   4. The wages the firm’s owner, Chloe, could earn if she worked for another company.
2. Consider the following information in the table for Chloe’s 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 Marginal Product of Capital   Marginal Product of Labor   Wage Rate   Rental Price of Pizza Ovens

   Cost 10,000   500   $15   $600

   
   

   1. 1. To increase productivity and lower costs of production, should Chloe rent more ovens and hire fewer workers, or rent fewer ovens and hire more workers? Explain.
         
         
3. Your answer must consist of a 450- to 500-word expository research essay.
   Consider Chloe’s Restaurant’s production decision in both the short run and long run. Chloe 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 Chloe make to increase productivity, minimize costs, and maximize profit?

Part 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 “ease of entry” 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 PG Library or on the Internet to answer the following questions.
   

   Company	Market Share
   Coca-Cola	35%
   Pepsi-Co	30%
   Cadbury Schweppes	25%
   Other	10%

   1. 1. Based on the market shares of the companies in the table, the merger of which companies will be highly concentrated?
      2. What ethical rules will be affected based on U.S. antitrust laws and merger guidelines in regard to a highly concentrated market?

1. 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 on U.S. merger guidelines and antitrust laws? Explain.
2. Do you think this market has barriers to entry? If yes, what might be the market barriers?

Part 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	Profit/Loss
   0	$75	$0	___	___	___	____
   1	75	90	___	___	___	____
   2	75	170	___	___	___	____
   3	75	290	___	___	___	____
   4	75	430	___	___	___	____
   5	57	590	___	___	___	____
   6	75	770	___	___	___	____

   
   

   1. Complete the table.
   2. What level of output should the firm produce to maximize profits?
   3. Assume this firm is making a loss when it produces its seventh unit of output. What should the firm do in the short run? Should it operate at loss or shut down in the short run?
3. A monopolistically competitive firm has the following demand and cost structure in the short run.

1. 1. Complete the table.
   2. What level of output maximizes profit or minimizes loss? 
   3. Should this firm operate or shut down in the short run? Why?

Part 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 bar code. 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. Existing bar code technology: upper-left box Wal-World earns $4 billion/Tarbo earns $3 billion. Upper-right box Wal-World earns $1 billion/Tarbo earns $2 billion. New barcode technology, lower-left box Wal-World earns $3 billion/Tarbo earns $1 billion. lower-right box Wal-World earns $2 bilion/Tarbo earns $4 billion.

1. 1. Does Wal-World have a dominant strategy? Briefly explain and justify your analysis.
   2. Does Tarbo have a dominant strategy? Briefly explain and justify your analysis.
   3. Is there a Nash equilibrium in this game? Briefly explain and justify your analysis.