Public management in your home country

ic Module 5: Managerial Decisions in Competitive Markets

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1. Insurance agents receive a commission on the policies they sell. Many states regulate the rates that can be charged for insurance. Would higher or lower rates increase the incomes of agents? Explain, distinguishing between the short-run and the long-run.
2. During a coffee-room debate among several young MBAs who recently graduated, one of the young
   executives flatly stated, “The most this company can lose on its Brazilian division is the amount it invested (its
   fixed costs).” Not everyone agreed with this statement. In what sense is this statement correct? Under what circumstances could it be false? Explain.
3. Even if firms in a mono-politically competitive market collude successfully and fix price, economic profit will still compete away if there is an unrestricted entry. Explain. Will the price be higher or lower under such an agreement in long-run equilibrium than would be the case if firms didn’t collude? Explain.
4. Antitrust authorities at the Federal Trade Commission are reviewing your company’s recent merger with a
   rival firm. The FTC is concerned that the merger of the two rival firms in the same market will increase market
   power. A hearing is scheduled for your company to present arguments that your firm has not increased its market power through the merger. Can you do this? How? What evidence might you bring to the hearing?
5. Dr. Leona Williams, a well-known plastic surgeon, has a reputation for being one of the best surgeons for
   reconstructive nose surgery. Dr. Williams enjoys a rather substantial degree of market power in this market.
   She has estimated demand for her work to be:
   Question 5 Equation 1.png
   where Q is the number of nose operations performed monthly and P is the price of a nose operation.
   a. What is the inverse demand function for Dr. Williams’ services?
   b. What is the marginal revenue function?
   The average variable cost function for reconstructive nose surgery is estimated to be:
   Question 5 Equation 2.png
   where AVC is the average variable cost (measured in dollars), and Q is the number of operations per month.
   The doctor’s fixed cost per month is $8,000.
   c. If the doctor wishes to maximize her profit, how many nose operations should she perform each month?
   d. What price should Dr. Williams charge to perform a nose operation?
   e. How much profit does she earn each month?

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