Exam 11: Performance and Strategy in Competitive Markets

Regulation Costs. Finlandia, Inc., manufacturers molded plastic products used to improve industrial productivity. Suppose the Occupation Health and Safety Administration (OSHA) has required the firm to enhance the durability of its popular safety helmet at a cost of $10 per unit. Prior to these costs, Finlandia's annual manufacturing costs of this item are: where Q is units produced per year and TC includes a normal rate of return on investment.

Regulation Costs. Ottawa Construction, Ltd., is a medium-sized housing contractor located in eastern Ontario. The company is adversely affected by new local regulations requiring it to pay $10,000 to cover sewer and water hook-up charges for each new apartment Ottawa builds. Before such expenses, Ottawa's construction costs are described as: where Q is the number of apartment units built per year and TC includes a normal rate of return on investment.

Utility price and profit regulation is designed to address:

Externalities are:

Competitive Market Surplus. Suppose demand and supply conditions in the competitive market for unskilled labor are as follows: where Q is millions of hours of unskilled labor and P is the wage rate per hour.

Failure by market structure is caused by:

Sales Tax and Elastic Demand. Assume that the supply of a best-selling book at local book stores throughout the United States is a function price such that: where Q is the number of books sold (in thousands) and P is the book price. Given the availability of this book on amazon.com for $20, demand is perfectly elastic at a price of $20.

Competitive Market Equilibrium. Suppose demand and supply conditions in the competitive market for unskilled labor are as follows: where Q is millions of hours of unskilled labor and P is the wage rate per hour.

Outsourcing Tariffs. The Seattle Software Company develops, manufactures, licenses, and supports a wide range of software products. Its software products include operating systems for servers, personal computers (PC), and intelligent devices; and server applications for distributed computing environments. To cut costs, the company has begun to outsource to various Asian markets a significant amount of code checking and software verification. The global code checking and software verification service market is fiercely price competitive with prices stable at $25 per hour for services provided by trained and experienced software engineers. Relevant total cost (TC) and marginal cost (MC) relations for a typical foreign supplier of code checking and software verification services (Q) are:

Franchise Tax and Inelastic Demand. Assume the supply of broadband services in the City of Williamsburg can be described as: where Q is thousands of homes served per month with broadband service, and P is the price per month. Also assume that broadband service demand is perfectly inelastic at a quantity of 30(000). This means that the broadband demand curve can be drawn as a vertical line that passes through 30(000) on the X-axis.

Failure by market structure can occur when:

A price ceiling is a costly and seldom used mechanism for:

Tariffs. The Manchester Shoe Corporation is an importer and distributor of foreign-made footwear that is sold at popular prices in leading discount retailers. The U.S. Commerce Department recently informed the company that it will be subject to a new 25% tariff on the import cost of rubberized footwear originating from China. The company is concerned that the tariff will slow its sales growth, given the highly competitive nature of the footwear market where wholesale prices are stable at $5 per unit. Relevant total cost (TC) and marginal cost (MC) relations for this product are:

Above-normal returns earned in the time interval that exists between when a favorable influence on industry demand or cost conditions first transpires and the time when competitor entry or growth finally develops are called:

A government policy that addresses market failures caused by positive externalities is:

Costs of Regulation. The Appalachian Coal Company sells coal to electric utilities in the southeast. Unfortunately, Appalachian's coal has high particulate content and, therefore, the company is adversely affected by state and local regulations governing smoke and dust emissions at its customer's electricity-generating plants. Appalachian's total cost and marginal cost relations are: where Q is tons of coal produced per month and TC includes a normal rate of return on investment.

Competition in the cable television service industry is furnished by:

The costs of pollution taxes are shared by consumers and producers when:

Percentage Tax and Inelastic Demand. Assume the supply of cable TV services in the City of San Marcos, Texas, can be described as: where Q is thousands of homes served per month with cable TV service, and P is the price per month. Also assume that cable TV service demand is perfectly inelastic at a quantity of 25(000).

Competitive Strategy. Carry Underwood runs Tax Preparation Services, Inc., a small firm that offers timely tax preparation services in Oklahoma City. Given the large number of competitors, the fact that tax preparers rely heavily upon standard tax-preparation software, and the lack of entry barriers, it is reasonable to assume that the tax form preparation market is perfectly competitive and that the average $150 price equals marginal revenue, P = MR = $150. Assume that TPS's annual operating expenses are typical of several such firms operating in the local market, and can be expressed by the following total and marginal cost functions: where TC is total cost per year, MC is marginal cost, and Q is the number of clients served. Total costs include a normal profit and allow for Underwood's employment opportunity costs.