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5.COURSE NAME: MANAGERIAL ECONOMICS

Please follow the instructions in the document.

Course name, topic name, question and instructions were posted individually in the document.

1.one main topic above 400 words and 2 references

2. Two replies each 250 words.(my classmate replies are posted in the document.

3. APA format

4. Assignment must needed as per instruction, as mentioned in attached document.

Please ping me if there is any question/confusion. Must follow instructions.

Thanks

No Plagiarismon time

Lesson 5 Discussion Forum

Discussion assignments will be graded based upon the criteria and rubric specified in the Syllabus.

For this Discussion Question, complete the following.

Question

Review the three articles about Inflation that are found below this.

Instructions:

1. Locate one journal article for each of your two chosen economic types. You need to focus on the Abstract, Introduction, Results, and Conclusion. For our purposes, you are not expected to fully understand the Data and Methodology.

2. Summarize these journal articles. Please use your own words. No copy-and-paste. Cite your sources.

3. During the second week of the Module, you will need to reply to the posts of two of your peers. Your replies must focus on increasing knowledge of the class and must advance the discussion further. Simply affirming your peers does not count as a substantive reply.

4.Please post (in APA format) your article citation.

5. Please provide 3 references under the discussion

6. Please post replies to 2 of my classmates each 250 words and their discussions are provided below.

Supplemental Resources: – Material Chapter 9 and 10:

v
Reading Assignment:
Please read Chapters 9 & 10 from the Managerial Economics and Strategy textbook
https://www.federalreserve.gov/newsevents/speech/kohn20060616a.htm

https://www.federalreserve.gov/econresdata/notes/ifdp-notes/2016/drivers-of-inflation-compensation-evidence-from-inflation-swaps-in-advanced-economies-20161230.html

https://www.federalreserve.gov/newsevents/speech/brainard20170530a.htm

Classmate post 1
by Krishna Katukam – Wednesday, 12 August 2020, 9:07 PM
Number of replies: 0

Evaluation of inflation by General article reviews
Nakamura, Steinsson, Sun & Villar (2018), “The elusive costs of inflation: Price dispersion during the US great inflation,” the article referenced on the topic of inflation shows that the authors consider the aspect of the inflation rate which influences Central banks ability to arrive at changes in policy. Hence the question raised by the researcher’s is identifying the crucial cost of inflation. They argue that the high inflation will be due to the inefficient price dispersion. The study was in the new connection model call work horse and the cost of inflation is identified as the magnitude by which the Welfare laws for my business cycle fluctuate in terms of the output of the model. There are also able to identify that price dispersion increases rapidly when there is inflation. Additionally, the action is size of price changes increase when there is inflation for stock price change is related to Christ for an optimal level in terms of higher inflation rate.
Islam, Abdul Ghani, Mahyudin & Manickam (2017) in “Determinants of factors that affecting inflation in Malaysia” In the article review on inflation the researches evaluate the concept in the case of the Malaysian economy to identify the factors that drives it inflation. The researchers are able to determine the factors by following quantitative method and economic trick method model to relate the dependent and independent variables. The categories of the two models in this paper were mathematical model as well as the economic model. Hence by discussions and developing positive correlations apart from multiple column collinearity inflation rates were identified. High inflation is also regarded as a negative impact in some of the main countries. And inflation is the twin as the factors by which economic and external factors apart from economy can be identified.
Balcilar, Gupta & Jooste (2017) “Long memory, economic policy uncertainty and forecasting US inflation: a Bayesian VARFIMA approach” inflation forecast are a vector and a fractional comparison will allow it to integrate and well autoregressive moving average model against the standard forecasting model for stock is the United States inflation forecast will be able to bring about major improvement when controlling the economic policy as well as persistently following the Policy with uncertainty. Thus the integrated autoregressive moving average model will comprise the inflation as well as keep you to outperform commonly used inflation forecast models.
References
Balcilar, M., Gupta, R., & Jooste, C. (2017). Long memory, economic policy uncertainty and forecasting US inflation: a Bayesian VARFIMA approach. Applied Economics, 49(11), 1047-1054.
Islam, R., Abdul Ghani, A. B., Mahyudin, E., & Manickam, N. (2017). Determinants of factors that affecting inflation in Malaysia. International Journal of Economics and Financial Issues, 7(2), 355-364.
Nakamura, E., Steinsson, J., Sun, P., & Villar, D. (2018). The elusive costs of inflation: Price dispersion during the US great inflation. The Quarterly Journal of Economics, 133(4), 1933-1980.
————————————————————————————————————————————-
Classmate post2:
by Deepak Reddy Lenkala – Sunday, 9 August 2020, 10:36 PM
Number of replies: 1

Introduction:
Inflation is bringing a lot of imbalance in the economy. The role of inflation risk premiums has increased for both the medium and also long-term inflation. On balance, the investors have always been willing to pay more to insure against a low information flow in an environment (Rubio, 2019). Since the ethical insinuations of conservative tax policy systems, they have lately received rehabilitated attention that is a more oblique scheme, and it remains unobserved. The salient wealth redistribution is the defining feature of inflation, and they are the savers as well as the monitory economy.
Inflation propagates through different ways. Two of them are inception as well as ongoing (Osman et al. 2029). It is essential first to measure the course through which flat cash that is certain through the legal tender status that does replace the existing commodity money in circulation. The lawful fond status assurances the sustained being for a flat money. The advantage of a certain request has been shaped through making a currency satisfactory in settlement of both public as well as private debts. Even though the legal fond status does apply only in depts, the induced money that is used for the payment of taxes does create a desire for the private agents so as to receive the same money in payment of private arrears as well.
Conclusion:
It can be hard to justify inflation from an moral point of opinion. Utilitarian does note that the disciplinary damages that are caused by rise do overshadow the unproven assistances that have been mainly imperfect to the point of reducing on the real value of debt. The natural right terrorists must receive that increase is a form of assessment. As the administration does demand the lawful fond money through direct taxation, and then it spends later. Through this, it creates a critical demand as well as the use of the legal loving cash.

Managerial Economics and Strategy
Third Edition
Chapter 9
Monopoly
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Managerial Problem
Brand-Name and Generic Drugs
Drug firms have patents that expire after 20 years and Congress expects drug prices to fall after it. But, evidence shows that prices went up.
Why do many brand-name drug companies raise their prices after generic rivals enter the market?
Solution Approach
We need to understand the decision-making process for a monopoly: the sole supplier of a good for which there is no close substitute.
Empirical Methods
The relevant market structure is monopoly, a single seller that sets price or output level to maximize profit where M C = M R.
A monopolist sets its price above its M C (market power) and creates a deadweight loss or market failure due to monopoly pricing.
A patent is one form of creating a monopoly, the other is cost.
To increase profits, a monopoly can use advertising and charge an initial low price to create a long-run network effect.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Learning Objectives (1 of 2)
9.1 Monopoly Profit Maximization
Show how a monopoly chooses an output level to maximize its profit
9.2 Market Power
Calculate the extent of a monopoly’s market power
9.3 Market Failure Due to Monopoly Pricing
Describe how monopoly causes a market failure

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Learning Objectives (2 of 2)
9.4 Causes of Monopoly
List the causes of monopoly
9.5 Advertising
Explain how a monopoly uses advertising to increase its profit
9.6 Internet Monopolies: Network Effects and Scale Economies
Discuss the sources of market power for internet firms

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9.1 Monopoly Profit Maximization (1 of 8)
Marginal Revenue:

A firm’s marginal revenue, M R, is the change in its revenue from selling one more unit.
Marginal Revenue and Price
The M R for a competitive firm
In Figure 9.1, panel a, a competitive firm that faces a horizontal demand and Δq=1. This competitive firm can sell more without reducing price.
So, M R = ΔR = B = p1
The M R for a monopoly firm
In Figure 9.1, panel b, a monopoly faces a downward-sloping market demand and Δq=1. This monopoly firm can sell more only if price goes down.
So, M R = ΔR = R2− R1 = B − C = p2 − C

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9.1 Monopoly Profit Maximization (2 of 8)
The Marginal Revenue Curve
The monopoly’s M R curve lies below a downward-sloping D curve for every q, and M R depends on the shape of the D curve.
M R Curve for a Linear Demand
The M R curve is a straight line that starts at the same point on the vertical (price) axis as the D curve but has twice the slope. In Figure 9.2, the D and M R curves have slopes − 1 and − 2, respectively.
M R Function:

The monopolist M R function is lower than p because the last term is negative.
When inverse D is p = 24 − Q, then M R = 24 − 2Q
M R Function with Calculus:

When inverse D is

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Figure 9.2 Elasticity of Demand and Total, Average, and Marginal Revenue

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9.1 Monopoly Profit Maximization (3 of 8)
Marginal Revenue and Price Elasticity of Demand
The M R at any given quantity depends on the demand curve’s height (the price) and shape.
The shape of the demand curve at a particular quantity is described by the price elasticity
of demand,

(percentage change in quantity demanded after
a 1 percent change in price).
M R & Elasticity Relationship:

This key relationship says M R is closer to price as demand becomes more elastic. Table 9.1 shows this relationship.
Where the demand elasticity is unitary, ε = − 1, M R is zero.
Where the demand curve is inelastic,

M R is negative.
Where the demand curve is perfectly elastic,

M R is p.
Figure 9.2 shows a linear D with all the elasticity values in Table 9.1.

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Table 9.1 Quantity, Price, Marginal Revenue, and Elasticity for the Linear Inverse Demand Function p = 24 − Q

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9.1 Monopoly Profit Maximization (4 of 8)
Choosing Price or Quantity
Any firm maximizes profit where its M R and M C are equal.
Rule for monopoly maximization:

A monopoly can adjust its price or its quantity to maximize profit.
Monopolist sets one, market decides the other
Whether the monopoly sets its price or its quantity, the other variable is determined by the downward sloping market demand curve.
The monopoly faces a trade-off between a higher price and a lower quantity or a lower price and a higher quantity.
Either Maximize Profit
Setting price or quantity are equivalent for a monopoly. We will assume it sets quantity.

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9.1 Monopoly Profit Maximization (5 of 8)
Two Steps to Maximizing Profit
All profit-maximizing firms use a two-step analysis:
1st, they determine the output Q* that maximizes profit.
2nd, they decide whether to produce Q* or shut down.
Profit-Maximizing Output (1st step)
Profit is maximized where marginal profit equals zero, or

In panel a of Figure 9.3, this occurs at point e, Q=6, p=18, π=60. This is the maximum profit in panel b.
At quantities smaller than 6 units, the monopoly’s M R > M C, so its marginal profit is positive. By increasing its output, it raises its profit.
At quantities greater than 6 units, the monopoly’s M C > M R, so its marginal profit is negative. By reducing its output, it raises its profit.
A monopoly’s profit is maximized in the elastic portion of the demand curve. In panel a, Figure 9.3, the elasticity of demand at point e is −3.
A profit-maximizing monopoly never operates in the inelastic portion of its demand curve.

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9.1 Monopoly Profit Maximization (6 of 8)
The Shutdown Decision (2nd Step)
A monopoly shuts down to avoid making a loss in the short run if its price is below its average variable cost at its profit-maximizing quantity q* (Chapter 7).
Figure 9.3 illustrates a short run case.
M R = M C determines q*. At this profit-maximizing output, the price is above the average variable cost (Q* = 6, A V C = $6, p = $18, π = $60). So, the monopoly chooses to produce and it makes a positive profit (p > A C).
The shutdown decision in the long run for the monopolist would occur if the price were less than its average cost.

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9.1 Monopoly Profit Maximization (7 of 8)
Using Calculus, Output Decision:

By setting the derivative of the profit function with respect to Q equal to zero, we have an equation that determines the profit-maximizing output.

In Figure 9.3, M R = 24 − 2 Q = 2 Q = M C. So, Q=6. Substituting Q = 6 into the inverse demand function (Equation 9.2), p = 24 – Q = 24 – 6 = 18.
Using Calculus, Shutdown Decision
At

which is less than the price. So, the monopoly
does not shut down.
At

which is less than the price. So, the monopoly
makes a profit.

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9.1 Monopoly Profit Maximization (8 of 8)
Effects of a Shift of the Demand Curve
Competitive Market Case
The effect of a shift in demand on a competitive firm’s output depends only on the shape of the marginal cost curve.
The new equilibrium (P = M C) occurs along the marginal cost curve, and for every equilibrium quantity, there is a single corresponding equilibrium price, as illustrated in Figure 9.4, panel a.
Monopoly Case
The effect of a shift in demand on a monopoly’s output depends on the shapes of both the marginal cost curve and the demand curve.
The new equilibrium (M R = M C) may occur at new levels of prices and quantities, or two different prices for the same quantity, or the same price for two different quantities.
In Figure 9.4, panel b, the shift of demand from

causes the optimum to
change from E1 to E2. The monopoly quantity stays the same, but the monopoly prices rises (one q associated with 2 prices).

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Figure 9.4 Effects of a Shift of the Demand Curve

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9.2 Market Power (1 of 6)
Market Power
A monopoly has market power, which is the ability to significantly affect the market price. In contrast, no single competitive firm can significantly affect the market price.
A profit-maximizing monopoly charges a price that exceeds its marginal cost. The extent to which the monopoly price exceeds marginal cost depends on the shape of the demand curve.
Common Confusion: The larger the monopoly, the more it can mark up its price over its cost, which is false.
Size doesn’t matter. Rather, a profit-maximizing monopoly marks up price over marginal cost more if consumers are less sensitive to price (the demand curve is less elastic).
For example, some drugs do not have a large volume of sales but have extremely high prices because they are crucial for a small segment of the population.

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9.2 Market Power (2 of 6)
Market Power and the Shape of the Demand Curve
If the monopoly faces a very inelastic demand curve (steep) at the profit-maximizing quantity, it would lose few sales if it raises its price.
However, if the demand curve is very elastic (flat) at that quantity, the monopoly would lose substantial sales from raising its price by the same amount.
Profit-Maximizing Price:

The monopoly’s profit-maximizing price is a ratio times the marginal cost and the ratio depends on the elasticity. In Table 9.2:
If ε = − 1.01, only slightly elastic, the ratio is 101 and p = 101 M C
If ε = − 3, more elastic, the ratio is only 1.5 and p = 1.5 M C
If

perfectly elastic, the ratio shrinks to 1 and p = M C
Thus, even in the absence of rivals, the shape of the demand curve constrains the monopoly’s ability to exercise market power.

Table 9.2 Elasticity of Demand, Price, and Marginal Cost

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9.2 Market Power (3 of 6)
Managerial Implication: Checking Whether the Firm Is Maximizing Profit
A manager can use

to determine whether the firm
is maximizing its profit.
Many private firms—such as A C Nielsen, I R I, and I M S Health—and industry groups collect data on quantities and prices in a wide variety of industries.
Firms can use these data to estimate the firm’s demand curve (Chapter 3) and hire consulting firms to estimate the elasticity of demand for their products.
If the

ratio does not approximately equal

then the manager knows that the firm is not setting its price to maximize its profit.

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9.2 Market Power (4 of 6)
The Lerner Index or Price Markup:

The Lerner Index measures a firm’s market power: the larger is the difference between price and marginal cost, the larger is the Lerner Index.
This index can be calculated for any firm, whether or not the firm is a monopoly.
Lerner Index and Elasticity:

The Lerner Index or price markup for a monopoly ranges between 0 and 1.
As Table 9.2 illustrates, the Lerner Index for a monopoly increases as the demand becomes less elastic:
If ε = − 1.01, only slightly elastic, the monopoly markup is 0.99 (99%)
If ε = − 3, more elastic, the monopoly markup is 0.33 (33%)
If

perfectly elastic, the monopoly markup is zero

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9.2 Market Power (5 of 6)
Sources of Market Power

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9.2 Market Power (6 of 6)
Sources of Market Power
Market power is determined by the availability of substitutes, number of firms and proximity of competitors.
Less Power with …
Less power with better substitutes: When better substitutes are introduced into the market, the demand becomes more elastic (Xerox pioneered plain-paper copy machines until …)
Less power with more firms: When more firms enter the market, people have more choices, the demand becomes more elastic (U S P S after FedEx and U P S entered the market).
Less power with closer competitors: When firms that provide the same service locate closer to this firm, the demand becomes more elastic (Wendy’s, Burger King, and McDonald’s close to each other).

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9.3 Market Failure Due to Monopoly Pricing
A perfect competitive firm achieves economic efficiency (maximizes total surplus, T S = C S + P S).
However, unlike perfect competition, a monopoly is economically inefficient because it wastes potential surplus, resulting in a deadweight loss.
The inefficiency of monopoly pricing is an example of market failure.
Market failure: nonoptimal allocation of goods & services with economic inefficiencies (price is not marginal cost).
A monopoly sets p > M C causing consumers to buy less than the competitive level of the good. It destroys some of the potential gains from trade. So society suffers a deadweight loss.
In Figure 9.5, the monopolist’s maximizing q and p are 6 and $18. The competitive values would be 8 and $16.
The deadweight loss of monopoly is −C − E. Potential surplus that is wasted because less than the competitive output is produced.

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9.4 Causes of Monopoly (1 of 2)
Monopoly markets exist mainly because of cost considerations and government policy.
Cost-Based Monopoly
Cost Advantages—A firm with substantial lower costs than potential rivals.
A low-cost firm is a monopoly if it sells at a price so low that other potential competitors with higher costs would lose money. No other firm enters the market.
The sources of it are superior technology, better production methods, control of either an essential facility or a scarce resource.
Natural Monopoly—A firm may produce the total output of the market at lower cost than two or more firms could.

is the sum of the
output of any n firms where

firms.
The reason is economies of scale: a natural monopoly has an strictly declining average cost curve (Figure 9.6).
When just one firm is the cheapest way to produce any given output level, governments often grant monopoly rights to public utilities of water, gas, electric power, or mail delivery.

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9.4 Causes of Monopoly (2 of 2)
Government Creation of Monopoly
Governments grant a license, monopoly rights, or patents
Barriers to Entry
Governments create monopolies either by making it difficult for new firms to obtain a license to operate or by explicitly granting a monopoly right to one firm, thereby excluding other firms.
By auctioning a monopoly to a private firm, a government can capture the future value of monopoly earnings. However, for political or other reasons, governments frequently do not capture all future profits.
Patents
A patent is an exclusive right granted to the inventor of a new and useful product, process, substance, or design for a specified length of time.
The length of a patent varies across countries, although it is now 20 years in the United States.

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9.5 Advertising (1 of 2)
Advertising is only one way to promote a product.
A firm advertises to raise its profit. A successful advertising campaign shifts the monopolist market demand curve outward and makes it less elastic. This allows the monopolist to sell more units at a higher price.
In Figure 9.7, after successful advertising D2 is to the right and it is less elastic than D1.
Deciding Whether to Advertise
Do it only if firm expects net profit (gross profit minus the cost of advertising) to increase.
In Figure 9.7, gross profit is B. Only if its cost of advertising is less than B, its net profit rises and advertising should be done.
How Much to Advertise
Do it until its marginal benefit (gross profit from one more unit of advertising or marginal revenue from one more unit of output) equals its marginal cost.

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9.5 Advertising (2 of 2)
Using Calculus for Optimal Advertising:

Profit equals revenue minus cost. Advertising, A, is a fixed cost and
affects revenue, R.

The monopoly maximizes its
profit by choosing Q and A.
First Order Condition:

The monopoly should set its output so that M R = M C
First Order Condition:

The monopoly should advertise to the point where its marginal
revenue or marginal benefit from the last unit of advertising,

equals the marginal cost of the last unit of advertising, $1.

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9.6 Internet Monopolies: Network Effects and Scale Economies (1 of 6)
Network Externalities
A good has a network externality if one person’s demand depends on the consumption of a good by others.
If a good has a positive network externality, its value to a consumer grows as the number of units sold increases.
Network externalities are an important source of monopoly power.
Classic example: When the phone was introduced, potential adopters had no reason to subscribe for phone service unless their family and friends did. Why pay for phone service if you have no one to call? For Bell’s phone network to succeed, it had to achieve a critical mass of users—enough adopters so that others wanted to join. Had it failed to achieve this critical mass, demand would have withered and the network would have died

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9.6 Internet Monopolies: Network Effects and Scale Economies (2 of 6)
Managerial Implication: Introductory Prices
Managers of firms that want to sell goods and services with network externalities often initially sell them at a low introductory price to obtain a critical mass. By doing so, the manager maximizes long-run profit but not short-run profit.
Assume a monopolist sells goods for only two periods. The manager should charge a low introductory price in the first period if the reduction in first-period profit is less than the extra profit in the second period. So, total profit is maximized.
Introductory prices is profitable for many firms. A 2018 Google search found over a million web pages touting an introductory price.
A closely related strategy used for many internet services is to start by offering a free version, then, after creating a large enough user base, offer a premium version at a positive (and profitable) price, like Yahoo! mail.

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9.6 Internet Monopolies: Network Effects and Scale Economies (3 of 6)
Behavioral Network Externalities
Network externalities depend on the size of the network because customers want to interact with each other.
Behavioral economics studies how consumers’ behavior depends on beliefs or tastes that can be explained by psychological and sociological theories.
Positive network externality
consumers sometimes want a good because “everyone else has it.”
bandwagon effect—A person places greater value on a good as more and more people possess it.
Negative network externality
snob effect—A person places greater value on a good as fewer and fewer people possess it.

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9.6 Internet Monopolies: Network Effects and Scale Economies (4 of 6)
Two-Sided Markets
A two-sided market or two-sided network is an economic platform that has two or more user groups that provide each other with network externalities. There are two common types.
Economic platforms match sellers with buyers. For instance, Airbnb (short-term rentals), Lyft (driver service), and Monster.com (an employment site).
Innovation platforms provide a technology upon which other firms can build and customers use. For instance, Google’s Android operating system for cell phones and the internet itself.
Many noninternet industries also have two-sided networks.
Both cardholders and merchants use credit cards. Gamers and game developers link using video-game consoles. Doctors and patients connect through health maintenance organizations and hospitals.

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9.6 Internet Monopolies: Network Effects and Scale Economies (5 of 6)
Natural Monopoly on the Internet
Many internet services require a large up-front fixed cost but have a low marginal cost, sometimes nearly zero. As a result, such firms have downward-sloping average cost curves, reflecting economies of scale. A monopoly or near-monopoly may emerge after a brief period of internet competition.
Google is an example of such natural monopoly. Google services are free to users, has a large user base that attracts advertisers and earns substantial profits. Any potential competitor providing an identical service would struggle to cover its fixed costs.
Facebook benefits from both a natural monopoly cost structure and network externalities.

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9.6 Internet Monopolies: Network Effects and Scale Economies (6 of 6)
Disruptive Technologies
The internet facilitates the introduction of disruptive technologies (Chapter 7) with strong network externalities and economies of scale.
Because these new internet technologies have network externalities, low marginal costs, and decreasing average cost curves, they often can drive out existing technologies.
Amazon is driving many traditional bookstores out of business.
Online news is driving print newspapers out of business.
Streaming movies killed off most of the movie videotape/C D/Blu-ray rental stores.
Streaming music has largely eliminated record-C D sales.

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Managerial Solution
Brand-Name and Generic Drugs
Drug firms have patents that expire after 20 years and Congress expects drug prices to fall after it. But, evidence shows that prices went up.
Why do many brand-name drug companies raise their prices after generic rivals enter the market?
Solution
When generic drugs enter the market after the patent expires, the demand curve facing the brand-name firm shifts to the left, and rotates to become less elastic at the original price.
Price sensitive consumers switch to the generic, but loyal customers prefer the brand-name drug (familiar and secure product for them).
Elderly and patients with generous insurance plans fit this group.

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< 1 ) 1/ ( MRp =+e 10, - M C, so its marginal profit is positive. By increasing its output, it raises its profit.
At quantities greater than 6 units, the monopoly’s M C > M R, so its marginal profit is negative. By reducing its output, it raises its profit.
A monopoly’s profit is maximized in the elastic portion of the demand curve. In panel a, Figure 9.3, the elasticity of demand at point e is −3.
A profit-maximizing monopoly never operates in the inelastic portion of its demand curve.