Question 1.
Woodard Inc. is a firm operating in a market with one other larger firm. The market is a mining industry for a rare metal. Woodard Inc. has the following short-run cost curve:
TC = 500,000 -1,000Q + 100Q2 and faces the following TOTAL market demand curve:
P = 40,000 - $20.50Q
a. Compute Woodard Inc.'s marginal cost curve.
b. To avoid entering a price war, Woodard Inc. just charges the same price as their competitor. Currently the price is $30,000. What is Woodard's marginal revenue function?
c. Given the strategy explained in part b, what quantity is Woodard Inc. producing (assuming they are choosing to maximize profit)? What is the total profit for Woodard Inc?
Now assume that the owner of the larger firm decides to retire, he leaves the firm to his children (who did not go to TAMUC) and within a month, the larger firm has been shuttered.
Now Woodard Inc. finds themselves as the only firm in the market.
d. If Woodard Inc. chooses the profit maximizing level of production for a monopolist, how much output will they produce?
e. Given the output calculated in part d, what price will they be able to charge as a monopolist?
f. Given that the price was $30,000 before the other firm went out of business, and assuming that there was no unmet demand at this price, how much total production was occurring in the market? Now that there is only one firm, how much has consumption decreased?
g. What can you say about the relative costs of the firm that went out of business compared to Woodard Inc. (in general - you don't have to calculate their specific Total or marginal costs) Why is this true?
h. Many of the examples in the text deal with natural resource industries.
Since this hypothetical example is for a mining industry, consuming a precious metal, comment on the tradeoff that is inherent between consumer advocacy groups and environmental conservation groups.
How does elasticity of the underlying good affect this tradeoff?
i. Before part d. I asked you to assume that the original owner had retired.
Now assume that the reason he retired is because of an anti-trust lawsuit in which he was to be investigated for price fixing. As a consultant, how can you easily show that the two firms were not behaving as a cartel. (You don't have his total cost information - so you don't have to prove no collusion, just that they weren't acting as a cartel)