BUSINESS AND INDUSTRIAL ECONOMICS

Prof. Paola Garrone

Analysis of perfect competition markets – Classroom example

In the last 15 years several livestock farmers of your country have converted to the production of organic
milk. Differently from conventional milk, and according to regulations, the breeders do not treat animals
with hormones and antibiotics, and feed them for many months of the year in pastures. The country’s
industry is made of 100 producers. Their costs have been studied by the industry association and the
following total costs function has been found to approximate well the production costs:
TC=75+12q^2 with TC[10000€-year], q[Mkg-year].
Organic milk quality is well defined also because of regulations, and homogeneous across producers.
Consumers of organic products are generally very well informed about the product characteristics and
prices. buy the national product because they trust regulations. The market demand is estimated to be:
p=160-0.2Q, with p[c€/kg], Q [Mkg-year].
A. Find the price and firm and market output in the short run.
B. Again in the short run find the equilibrium profit and describe the decisions made by producers given
that profit.
C. In the long run organic milk producers can exit and enter the market without meeting substatial
barriers. Discover whether the market price and output and the number of industry producers change.

Analysis of monopoly markets – Classroom example

Three graduate students of your university have founded a startup that developed a new service offered
to farmers called WD (Weather Detect). After deploying a mobile network of drones that collect data on
very detailed weather conditions at a micro geographical scale, WD elaborates data and sends to
subscribers (farmers) a set of high-frequency and geographically specific reports and high-quality
forecasts through a mobile application (humidity, temperature, wind, pollutants, and so on). The
underlying technology and the whole system design are being protected from imitation by a few patents
valid for 10 years.
WD services are offered on a yearly subscription basis and sold at a yearly fee. The function of yearly
total costs of WD is as follows:
TC = 640 000 + 4 q^2, with TC[€-year] and q[subscriptions].
After a marketing study the market demand has been estimated through the following function.
p = 24 000 – 2 Q (Q[subscriptions], p[€/subscription]).
WD is now analysing the market to answer these questions.
- What would be the best fee for the service to charge to subscribers? How many subscription will
it sell at that price? Which profit will it obtain?
- Which minimum price would be acceptable in order not to lose money?