Question

The following list gives some information about seven firms. (20 points)

A. Coca Cola cuts its price below that of Pepsi Cola in an attempt to increase its market share. (NM)
B. A single firm, protected by a barrier to entry, produces a personal service that has no close substitutes. (NM)
C. A barrier to entry exists, but the good has some close substitutes.
D. A firm offers discounts to students and seniors.
E. A firm can sell any quantity it chooses at the going price.
F. The government issues Tiger Woods, Inc. an exclusive license to produce golf balls.
G. A firm experiences economies of scale even when it produces the quantity that meets the entire market demand.
1. In which of the seven cases might monopoly arise?
2. Which of the seven cases are natural monopolies and which are legal monopolies?
Which can price discriminate, which cannot, and why?

Answer 1

Based on the information provided, monopoly could arise in cases C, F, and G. Firms that can price discriminate are E and F, while firms that cannot price discriminate are A, B, C, and D.

Step-by-step explanation:

Based on the information provided, a monopoly could arise in cases C, F, and G:

1. Case C: A barrier to entry exists, but the good has some close substitutes. In this case, if one firm gains control of the market and restricts or eliminates competition, it can become a monopoly.
2. Case F: The government issues Tiger Woods, Inc. an exclusive license to produce golf balls. This exclusive license prevents other firms from entering the market and competing with Tiger Woods, Inc., creating a legal monopoly.
3. Case G: A firm experiences economies of scale even when it produces the quantity that meets the entire market demand. This situation indicates a natural monopoly, where one large firm can produce goods more efficiently than multiple smaller firms due to economies of scale.

Regarding price discrimination, firms that can price discriminate are those that have the power to charge different prices to different groups of consumers. In this case, firms that can price discriminate are E and F:

1. Case E: A firm can sell any quantity it chooses at the going price. This suggests that the firm has the ability to set different prices for different customers based on their willingness to pay.
2. Case F: Tiger Woods, Inc. has been granted an exclusive license to produce golf balls. As a result, it may have the power to charge different prices to different customers.

On the other hand, firms that cannot price discriminate are A, B, C, and D because either they don't have the power to set prices or the goods they produce have close substitutes that limit their ability to charge different prices.