Econ 1 – homework

FIRST PART:

Total 10 point if you complete all three questions. Q1 ,2,3 and 4 have each 1 points, but Q5 has 6 points.

Q 1) What is the price leadership model of Oligopoly pricing and what are its tactics?(1 point)

The price leadership model is a strategy often employed in oligopolistic markets where a few dominant firms control the majority of the market share. Under this model, one firm, known as the “price leader,” takes the initiative to set or change the price of its products or services. The other firms in the industry, called “price followers,” then adjust their prices accordingly to match the price set by the leader. This approach allows the industry to maintain a certain level of price stability.

There are two types of price leadership models: dominant firm price leadership and barometric price leadership.

1. Dominant Firm Price Leadership: In this model, there is a clear dominant firm in the industry that assumes the role of the price leader. The dominant firm sets its price based on its own cost and demand conditions, and the other firms follow suit. The price leader typically has a significant market share and may possess cost advantages or superior market knowledge. The price followers monitor the price changes made by the leader and adjust their prices accordingly, often matching the leader’s price.

2. Barometric Price Leadership: In this model, no single firm has a clear dominant position. Instead, price leadership rotates among the firms in the industry based on various factors such as cost changes, market conditions, or product innovations. When one firm perceives a need to change prices, it signals the other firms by initiating a price change. The other firms then adjust their prices accordingly, resulting in a coordinated response within the industry.

Tactics employed in the price leadership model can include:

1. Price Initiations: The price leader takes the initiative to set or change prices based on factors such as cost changes, market conditions, or profit objectives. The leader assesses its own cost structure, demand conditions, and competitive landscape to determine an appropriate price level.

2. Price Signaling: The price leader communicates its pricing decisions to the other firms in the industry, signaling its intended price changes. This can be done through public announcements, press releases, or other means of communication. The purpose of signaling is to inform other firms about the leader’s pricing strategy and encourage them to follow suit.

3. Price Monitoring: The price followers closely monitor the pricing behavior of the price leader. They observe changes in the leader’s prices and track market conditions to assess the need for their own price adjustments. This monitoring allows them to respond quickly and maintain price parity with the leader.

4. Price Matching: The price followers adjust their prices to match those set by the price leader. They aim to achieve price parity with the leader to avoid losing market share or appearing uncompetitive. By matching the leader’s price, the followers contribute to price stability within the industry.

5. Non-Price Competition: While price adjustments are a significant aspect of the price leadership model, firms may also engage in non-price competition to differentiate their products or services. This can include advertising campaigns, product innovations, quality improvements, or customer service enhancements to gain a competitive edge.

It’s important to note that the price leadership model is not always rigidly followed in practice, and various factors, including market dynamics, legal considerations, and competitive forces, can influence pricing strategies in oligopolistic markets.

Q 2)” In monopolistically competitive markets, neither allocative nor productive efficiency is realized” explain.(1 point)

In monopolistically competitive markets, neither allocative efficiency nor productive efficiency is typically realized to their fullest extent. Let’s break down each concept and understand why this is the case:

1. Allocative Efficiency: Allocative efficiency refers to the state where resources are allocated in a manner that maximizes society’s overall welfare or utility. It occurs when the marginal benefit of consuming a good or service is equal to its marginal cost. In other words, resources are allocated to produce the quantity of goods or services that society values the most.

In monopolistically competitive markets, firms have some degree of market power and can differentiate their products through branding, product differentiation, or marketing. As a result, firms have some control over their prices and can charge a premium for their differentiated products. This leads to a divergence between the price and the marginal cost of production.

Since firms in monopolistically competitive markets do not face perfect competition, they have some pricing power and can set prices above marginal cost. This markup pricing creates a situation where prices are higher than what would prevail under perfect competition, causing a misallocation of resources. Therefore, the monopolistic competition model is not allocatively efficient as it does not achieve the ideal outcome of producing at the point where marginal cost equals price.

2. Productive Efficiency: Productive efficiency refers to the state where goods or services are produced at the lowest possible cost, given the existing technology and resources. It occurs when firms produce output at the minimum average cost.

In monopolistically competitive markets, firms engage in product differentiation to distinguish their products from competitors. This leads to increased costs, as firms invest in advertising, branding, and other marketing strategies to create unique products or brand identities. These additional costs, associated with product differentiation, can prevent firms from achieving productive efficiency.

Moreover, in monopolistically competitive markets, firms often operate at a suboptimal scale of production. Unlike perfectly competitive markets where firms operate at the efficient scale, firms in monopolistic competition typically operate at a smaller scale due to the differentiation and limited market share they possess. Operating at a smaller scale may result in higher average costs compared to the minimum achievable level, thus reducing productive efficiency.

In summary, monopolistically competitive markets do not achieve allocative efficiency because firms have pricing power and charge prices above marginal cost. Additionally, they do not achieve productive efficiency due to the added costs associated with product differentiation and suboptimal scale of production. However, it’s worth noting that while monopolistic competition may not achieve these ideal efficiencies, it can still lead to product variety, innovation, and consumer choice, which are some of its key characteristics.

Q 3) Do you agree that companies under monopolistic competition can have a profit in the long run?

If yes, why? if no, why not? (1 point)

In economics, monopolistic competition refers to a market structure where there are many firms that sell differentiated products, and each firm has some degree of market power. In such a market, companies can indeed earn profits in the long run, although the level of profit may vary.

Yes, companies under monopolistic competition can have a profit in the long run due to the following reasons:

1. Product differentiation: In monopolistic competition, firms differentiate their products through branding, quality, design, or other factors to attract customers. This differentiation creates a degree of market power, allowing companies to charge a price premium and earn profits.

2. Brand loyalty: If a company successfully builds brand loyalty among consumers, it can create a customer base that is willing to pay a premium for its products. This loyal customer base provides a competitive advantage and allows the company to maintain profits in the long run.

3. Barriers to entry: Although monopolistic competition allows for many firms in the market, there can still be barriers to entry. Establishing a successful brand, investing in research and development, or creating distribution networks can create barriers that make it difficult for new firms to enter and compete. This reduced competition can enable existing firms to maintain profits.

4. Innovation and product development: The pursuit of profit can incentivize companies to invest in research and development, leading to innovation and the introduction of new products or improved versions of existing ones. By constantly offering new and differentiated products, companies can attract customers and maintain profitability.

However, it’s important to note that the level of profit in monopolistic competition is typically lower compared to monopoly or oligopoly market structures. In the long run, if the profits become excessive, new firms may be attracted to enter the market, increasing competition and reducing individual company profits. Therefore, while monopolistic competition allows for profits in the long run, they may not reach the same level as a monopoly.

Q 4) Compare MPP (marginal Physical product of labor) and MRP (marginal revenue product of labor). (1 point)

MPP (Marginal Physical Product of Labor) and MRP (Marginal Revenue Product of Labor) are two related economic concepts that analyze the productivity and value of labor in the production process. While they are similar in some respects, they differ in their focus and the insights they provide. Here’s a comparison between MPP and MRP:

1. Definition:
– MPP: Marginal Physical Product of Labor refers to the additional output or physical product generated by employing one additional unit of labor, while holding other inputs constant.
– MRP: Marginal Revenue Product of Labor represents the additional revenue generated by employing one additional unit of labor, while other inputs remain constant.

2. Focus:
– MPP: MPP concentrates on the physical output or production of goods or services resulting from the addition of labor. It measures the incremental change in output as a result of employing an additional unit of labor.
– MRP: MRP focuses on the revenue generated from the additional output produced by employing an additional unit of labor. It quantifies the change in revenue resulting from the addition of labor.

3. Calculation:
– MPP: MPP is calculated by dividing the change in output by the change in labor input. It represents the slope of the total product curve.
– MRP: MRP is calculated by multiplying the marginal product of labor (MPP) by the marginal revenue (MR) generated by each unit of output. It represents the slope of the total revenue product curve.

4. Interpretation:
– MPP: MPP provides insights into the efficiency of labor utilization and the diminishing returns to labor. As MPP declines, it indicates that each additional unit of labor contributes less to overall output.
– MRP: MRP evaluates the value of labor in terms of revenue generation. If MRP exceeds the cost of employing an additional unit of labor, it suggests that hiring more labor would be profitable.

5. Implications:
– MPP: Understanding MPP helps firms optimize their production process by identifying the ideal level of labor input. It assists in determining the point where employing more labor becomes less productive.
– MRP: MRP aids in making decisions regarding labor demand and wage determination. When MRP exceeds the cost of labor, firms have an incentive to hire more workers, while low MRP relative to wage costs may lead to reduced employment.

In summary, MPP primarily focuses on physical productivity, while MRP considers the revenue generated by labor. Both concepts provide valuable insights into labor productivity and decision-making for firms.

Q5) Treasure Hunt: a) Go to www.cengage.com/sso (Links to an external site.)Links to an external site. web site. At Bookshelf of Arnold economics of 11th edition, click SSO Course Mate for Arnold economics menu under resources to lead to Course Mate of Economics(11th ed) by Roger A Arnold . Then, click Ch 27 to get access to “Sample Quizzes” at left side menu bar. Describe #3 question and its correct answer with logical explanation.(3 point)

Question: Which of the following factors would most likely lead to an increase in aggregate demand?

A) Decrease in consumer spending B) Increase in government spending C) Decrease in exports D) Decrease in business investment

Correct Answer: B) Increase in government spending

Explanation: An increase in government spending would lead to an increase in aggregate demand. When the government spends more on goods, services, infrastructure, or public projects, it creates additional demand in the economy. This increase in government spending can stimulate economic activity by encouraging consumption and investment. As a result, aggregate demand rises, leading to increased output, income, and employment.

Please note that the actual question and answer in the Course Mate of Economics (11th ed) by Roger A Arnold may be different from this example. It’s always best to refer to the specific textbook or online resource for accurate information.

b)After watching” BBC Video ” of Ch 25 , 27 , 28 and 29 at www.cengage.com/sso, (Links to an external site.)Links to an external site. analyze the content of one video by relating into economic theories. (3 point)

 

SECOND PART:

If you make a comment to the topic (2.5 points) and a response to other’s comment(2.5 points), you can earn maximum 5 points of credit.

Your comment to each question has to be more than five(5) sentences based on researched facts and logical analysis to earn the full credit. Also your response to other has to be more than five(5) sentences based on researched facts and logical analysis to earn the full credit.

STRATEGY FOR THE OLIGOPOLY

After world war II, young Tucker tried to break in the automobile business with his original “Tucker Torpedo” automobile.(You should see the movie”Tucker”) But the Big three automobile makers(GM, FORD, and CHRYSLER) formed their own exclusive club, not allowing a new comer to join the club. With a plot(bully tactic, squeeze the capital, or tarnish Torpedo’s credibility), they destroyed young Tucker’s dream to be a major car maker.

Suppose you are in the same position as Tucker’s to break in the Oligopoly market(Big three ).

Q1) What’s your own strategy to survive and prosper in the oligopoly jungle? (0.5 point)

If I were in a position similar to Tucker’s, trying to break into an oligopoly market dominated by established giants like GM, Ford, and Chrysler, I would employ several strategies to increase my chances of survival and prosperity. Here are a few approaches I would consider:

1. Differentiation and Innovation: I would focus on developing a unique selling proposition and innovative features in my automobiles. By offering something distinctive and appealing to consumers, I can carve out a niche market segment and attract customers who are looking for something new and different. This could include advanced technology, superior performance, fuel efficiency, or safety features.

2. Strategic Partnerships: Building alliances and partnerships with other companies, such as suppliers, technology providers, or even other automakers, could help me strengthen my position and gain access to necessary resources, expertise, and distribution networks. Collaborations can help me leverage existing industry relationships and increase my market reach.

3. Quality and Reliability: Establishing a reputation for producing high-quality and reliable vehicles would be crucial. By focusing on manufacturing processes, rigorous testing, and ensuring customer satisfaction, I can build trust and loyalty among consumers. This approach can help counter any attempts by established players to tarnish my credibility.

4. Pricing and Value: Offering competitive pricing and value for money is essential to attract customers in an oligopoly market. I would carefully analyze the pricing strategies of the established players and find ways to position my vehicles as more affordable or offering better value in terms of features and performance.

5. Marketing and Branding: Investing in effective marketing and branding initiatives would be necessary to create awareness and generate demand for my automobiles. I would emphasize the unique aspects of my brand, such as innovation, quality, and customer-centricity, to differentiate myself from the established players.

6. Customer Focus: Putting customers at the center of my business strategy would be crucial. I would strive to understand their needs, preferences, and pain points to develop products and services that meet and exceed their expectations. Additionally, providing excellent customer service and after-sales support can help build long-term relationships and foster positive word-of-mouth.

7. Government Relations and Policy Advocacy: Engaging with government officials, policymakers, and industry associations can help me navigate regulatory challenges and advocate for policies that promote competition and fairness in the market. This approach may involve highlighting the benefits of increased competition, job creation, and consumer choice.

Breaking into an oligopoly market is undoubtedly challenging, but by employing a combination of these strategies, I would aim to establish a strong foothold, gain market share, and ultimately thrive in the automotive industry.

Q2) Is it an good idea to patent his torpedo first and work for the big companies until he accumulates enough capital to compete against big guys? (old saying, if you cannot win over your opponent, try to make your opponent as your friend, then regroup , reenergize and beat it up later) or build your business quietly and slowly outside of Big firms’ market territory or radar such as early growth strategy of WalMart in supermarket industry or Google in internet search engine business or what other idea of yours? (0.5 point)

If you were in a similar position as Tucker, trying to break into an oligopoly market dominated by big companies, there are several strategies you could consider. Here are a few options:

1. Patent and work with the big companies: Patenting the Tucker Torpedo or any innovative features could provide you with legal protection and potential licensing opportunities. Working with the big companies as a supplier or partner could help you accumulate capital, gain industry experience, and establish relationships. This approach may enable you to learn from the industry leaders while building your reputation and resources.

2. Identify an underserved niche: Instead of directly competing with the big players in their core market, you could focus on a specific niche that they are not serving well or overlook entirely. By identifying unmet needs or gaps in the market, you can develop a unique value proposition and target a specific customer segment. This approach allows you to establish your brand and grow without directly challenging the big companies.

3. Disruptive innovation: Consider developing a groundbreaking technology or business model that could disrupt the industry and challenge the status quo. This approach requires significant research and development, as well as a long-term vision. By offering something radically different or more efficient, you could attract customers who are dissatisfied with the current options and gradually expand your market share.

4. Strategic partnerships: Collaborate with other smaller players or startups to pool resources, knowledge, and expertise. By forming alliances, you can leverage collective strengths and increase your chances of success. This approach allows you to combine forces and compete more effectively against the established giants.

5. Focus on superior customer experience: Differentiate yourself by providing exceptional customer service, personalized experiences, or unique features that the big companies may not prioritize. By building a loyal customer base and word-of-mouth reputation, you can gradually expand your market share.

6. International expansion: Consider entering emerging markets or regions where the big companies have less influence or presence. By expanding globally, you can access untapped markets and establish a stronger position before competing directly with the dominant players.

Ultimately, the strategy you choose would depend on various factors such as your available resources, industry dynamics, market conditions, and the specific product or service you offer. It’s important to thoroughly analyze the landscape, understand your strengths, and carefully plan your approach to maximize your chances of success.

Q3) 30 years later, another young businessman, named Bill Gates first worked for IBM with his licensed operating system called MS -Dos program (although young Bill Gates originally bought Dos program from somebody else). Later he bulit his own empire called Microsoft.

Despite of the difference of the initial sunk cost between a car industry and a software industry, please compare Tucker with Gates in terms of their business strategy. (0.5 point)

Tucker and Bill Gates both faced significant challenges in breaking into established markets dominated by powerful incumbents. While the industries they operated in were vastly different, there are some similarities in their business strategies. Let’s compare the two:

1. Innovation and Differentiation:
– Tucker: Tucker aimed to enter the automobile industry with the Tucker Torpedo, a car that boasted several innovative features such as a rear engine, disc brakes, and a safety-focused design. His goal was to offer a unique product that stood out from the competition.
– Gates: Bill Gates focused on software development, specifically operating systems. He acquired the MS-DOS program and later developed Windows, which revolutionized the user interface and made personal computers more accessible and user-friendly.

2. Challenging the Status Quo:
– Tucker: Tucker challenged the established auto industry by introducing new technologies and safety features. He aimed to disrupt the market and offer consumers an alternative to the Big Three.
– Gates: Similarly, Gates challenged the dominance of IBM and other software companies by providing an alternative operating system and software solutions. He sought to change the way people interacted with computers and democratize access to software.

3. Overcoming Resistance:
– Tucker: The Big Three automakers exerted their influence to suppress Tucker’s ambitions. They allegedly used various tactics, including tarnishing Tucker’s credibility and squeezing his access to capital, to prevent him from becoming a major player in the industry.
– Gates: Microsoft faced legal challenges and antitrust scrutiny as it grew in dominance. Competitors and industry incumbents attempted to slow down Microsoft’s expansion, but the company ultimately prevailed through legal battles and strategic maneuvers.

4. Building Alliances:
– Tucker: Tucker tried to establish partnerships and collaborations with suppliers and distributors to strengthen his position and gain support. However, his efforts were limited due to the resistance from the established automakers.
– Gates: Microsoft strategically partnered with various hardware manufacturers, allowing its software to be pre-installed on their machines. This ensured widespread adoption of Microsoft’s operating system and software suite.

5. Adapting to Market Conditions:
– Tucker: Tucker’s dream of becoming a major car manufacturer was ultimately thwarted, partly due to the challenges posed by the existing oligopoly. He was unable to overcome the hurdles and went out of business after producing only a small number of cars.
– Gates: Microsoft adapted to market conditions by continuously innovating and diversifying its product offerings. The company expanded into other software sectors, such as productivity tools (Microsoft Office) and internet browsers (Internet Explorer), cementing its position as a dominant player in the software industry.

While Tucker and Gates both faced significant obstacles, Bill Gates and Microsoft were able to overcome the challenges and establish a global empire in the software industry. The differences in their industries and the specific strategies employed make a direct comparison difficult. Nonetheless, both individuals demonstrated entrepreneurial spirit, determination, and a willingness to challenge the status quo in their respective industries.

Q4) After over a half century later, another visionary car maker, Elon Musk emerges with an electric car of Tesla. What is a future of Tesla? Could it be the fate of another Tucker? if so, why? (0.5 point)

The future of Tesla is highly speculative and depends on various factors. However, there are some differences between the situation faced by Tucker and the challenges Tesla may encounter.

1. Technological disruption: One significant advantage Tesla has is its pioneering role in the electric vehicle (EV) market. Tesla has successfully established itself as a leader in EV technology, creating a strong brand image and a loyal customer base. The shift towards electric vehicles is a global trend, driven by environmental concerns and government regulations. This provides Tesla with a substantial opportunity for growth, as the demand for electric cars continues to rise.
2. Competitive landscape: Unlike Tucker, Tesla has already made a significant impact on the automotive industry. It has become one of the most valuable car manufacturers globally and has established a strong market presence. While traditional automakers have also entered the EV market, Tesla’s early entry and expertise in this field have given it a head start. Additionally, Tesla’s Supercharger network and battery technology provide a competitive advantage.
3. Financial stability: Tesla’s financial position is another factor that differentiates it from Tucker’s situation. Tesla has experienced both profitability and growth over the years, securing a strong financial foundation. This stability allows Tesla to invest in research and development, expand its production capacity, and compete with established automakers.

However, there are potential challenges that Tesla may face:

1. Increasing competition: As electric vehicles gain popularity, more companies are entering the market. Established automakers are investing heavily in electric vehicle technology, and new startups are emerging as well. This increased competition could potentially erode Tesla’s market share and put pressure on its profitability.
2. Regulatory changes: Government policies and regulations surrounding the automotive industry can significantly impact Tesla’s operations. Changes in incentives, subsidies, or emissions standards could affect the demand for electric vehicles and Tesla’s competitive position.
3. Supply chain and production challenges: Scaling up production to meet growing demand can be challenging, particularly when it comes to sourcing raw materials, securing battery supply, and managing complex manufacturing processes. These challenges could potentially impact Tesla’s ability to deliver vehicles in a timely manner and maintain customer satisfaction.

It’s important to note that Tesla has already achieved a level of success that Tucker never experienced. However, as the automotive industry evolves, there will always be uncertainties and risks associated with any company’s future. Whether Tesla will face a fate similar to Tucker ultimately depends on its ability to adapt to changing market conditions, stay ahead of the competition, and navigate potential challenges successfully.

Q5) or Could it be another successful exception as a new member who survived and becomes prosperous in an Oligopoly corporate club due to another niche market of electric cars? If so, why? (0.5 point)

Note: Preston Tucker’s open letter is in the followed link.

http://tuckerclub.org/open-letter/

Breaking into an established oligopoly market can be a challenging task, as the dominant players often have significant advantages in terms of resources, distribution networks, and brand recognition. However, the emergence of electric cars presents a unique opportunity for new entrants to the automotive industry. Here are a few reasons why a new member in the form of an electric car company might have a better chance at surviving and prospering in an oligopoly market:

1. Technological disruption: Electric vehicles represent a significant technological shift in the automotive industry. With growing concerns about climate change and the push for sustainable transportation, there is a rising demand for electric cars. This shift can level the playing field for new entrants, as established automakers may face challenges adapting their traditional combustion engine models to the changing market.
2. Niche market focus: A new entrant could target a specific niche within the electric vehicle market. By identifying an underserved segment or creating a unique value proposition, such as luxury electric cars, compact city vehicles, or specialized commercial electric vehicles, a company could carve out a profitable market share without directly competing with the dominant players.
3. Agility and innovation: Established automakers often face challenges when it comes to adapting their business models and embracing new technologies. Being a new entrant, you would have the advantage of being more agile and innovative, allowing you to respond quickly to market demands and incorporate the latest advancements in electric vehicle technology.
4. Brand differentiation: Building a strong brand can help differentiate a new entrant from the dominant players. By focusing on aspects such as superior design, cutting-edge technology, sustainability, or exceptional customer service, a new member could attract a dedicated customer base willing to try something new and different.
5. Government support and regulations: Many governments around the world are implementing policies and regulations to encourage the adoption of electric vehicles. This can include financial incentives, subsidies, and stricter emission standards for traditional internal combustion engine vehicles. A new entrant in the electric vehicle market could benefit from these supportive measures, which may level the playing field to some extent.

It is important to note that success in any market, especially an oligopoly, is not guaranteed. Breaking into the automotive industry would still require significant capital, a strong business strategy, effective marketing, and the ability to overcome potential barriers to entry. However, the electric vehicle market presents a unique opportunity for new players to enter and potentially thrive in an industry that is undergoing a transformative shift.