Chapter 13

Each of the following firms possesses market power. Explain its source. a. Merck, the producer of the patented cholesterollowering drug Zetia b. WaterWorks, a provider of piped water c. Chiquita, a supplier of bananas and owner of most banana plantations d. The Walt Disney Company, the creators of Mickey Mouse

Jimmy's room overlooks a major league baseball stadium. He decides to rent a telescope for $\mathrm{\$}50.00$ a week and charge his friends to use it to peep at the games for 30 seconds. He can act as a single-price monopolist for renting out "peeps." For each person who takes a 30 -second peep, it costs Jimmy $\mathrm{\$}0.20$ to clean the eyepiece. This table shows the information Jimmy has gathered about the weekly demand for the service. a. For each price in the table, calculate the total revenue from selling peeps and the marginal revenue per peep. b. At what quantity will Jimmy's profit be maximized? What price will he charge? What will his total profit be? c. Jimmy's landlady complains about all visitors and tells him to stop selling peeps. But, if he pays her $\mathrm{\$}0.20$ for every peep he sells, she won't complain. What effect does the $\mathrm{\$}0.20$ -per-peep bribe have on Jimmy's marginal cost per peep? What is the new profit-maximizing quantity of peeps? What effect does the $\mathrm{\$}0.20$ -per-peep bribe have on Jimmy's total profit? $$\begin{array}{cc}\text{ Price of }& \text{ Quantity of }\\ \text{ peep }& \text{ peeps demanded }\\ \\ 1.20& 0\\ \text{1}.00& 100\\ 0.90& 150\\ \text{0}.80& 200\\ \text{0}.70& 250\\ \text{0}.60& 300\\ \text{0}.50& 350\\ \text{0}.40& 400\\ \text{0}.30& 450\\ \text{0}.20& 500\\ 0.10& 550\end{array}$$

Suppose that De Beers is a single-price monopolist in the diamond market. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamond-and only if the price is just equal to, or lower than, her willingness to pay. Raquel's willingness to pay is $\mathrm{\$}400;$ Jackie's, $300; Joan's, $200; Mia's, $100; and Sophia's, $0. De Beers's marginal cost per diamond is $\mathrm{\$}100.$ The result is a demand schedule for diamonds as follows: $$\begin{array}{cc}\begin{array}{c}\text{ Price of }\\ \\ \text{ diamond }\end{array}& \begin{array}{c}\text{ Quantity of diamonds }\\ \text{ demanded }\end{array}\\ \\ 500& 0\\ \text{4}00& 1\\ \text{3}00& 2\\ \text{2}00& 3\\ \text{1}00& 4\\ \text{0}& 5\end{array}$$ a. Calculate De Beers's total revenue and its marginal revenue. From your calculation, draw the demand curve and the marginal revenue curve. b. Explain why De Beers faces a downward-sloping demand curve and why the marginal revenue from an additional diamond sale is less than the price of the diamond. c. Suppose De Beers currently charges $\mathrm{\$}200$ for its diamonds. If it lowers the price to $\mathrm{\$}100$, how large is the price effect? How large is the quantity effect? d. Add the marginal cost curve to your diagram from part a and determine which quantity maximizes De Beers's profit and which price De Beers will charge.

Explain the following situations. a. In Europe, many cell phone service providers give away for free what would otherwise be very expensive cell phones when a service contract is purchased. Why might a company want to do that? b. In the United Kingdom, the country's antitrust authority prohibited the cell phone service provider Vodaphone from offering a plan that gave customers free calls to other Vodaphone customers. Why might Vodaphone have wanted to offer these calls for free? Why might a government want to step in and ban this practice? Why might it not be a good idea for a government to interfere in this way?

The 2014 announcement that Time Warner Cable anc Comcast intended to merge prompted questions 0 monopoly because the combined company would supply cable access to an overwhelming majority of Americans It also raised questions of monopsony since the com bined company would be virtually the only purchaser programming for broadcast shows. Assume the merge occurs: in each of the following, determine whether it i evidence of monopoly, monopsony, or neither. a. The monthly cable fee for consumers increases significantly more than the increase in the cost of producing and delivering programs over cable. b. Companies that advertise on cable TV find that they must pay higher rates for advertising. c. Companies that produce broadcast shows find they must produce more shows for the same amount they were paid before. d. Consumers find that there are more shows available for the same monthly cable fee.

Walmart is the world's largest retailer. As a consequence, it has sufficient bargaining power to push its suppliers to lower their prices so it can honor its slogan of "Always Low Prices" for its customers. a. Is Walmart acting like a monopolist or monopsonist when purchasing goods from suppliers? Explain. b. How does Walmart affect the consumer surplus of its customers? The producer surplus of its suppliers? c. Over time, what is likely to happen to the quality of products produced by Walmart suppliers?