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Twenty years ago, cable television companies typically exhibited the following characteristics: They were granted the exclusive right to provide cable service to customers in a particular city; e
Twenty years ago, cable television companies typically exhibited the following characteristics: They were granted the exclusive right to provide cable service to customers in a particular city; e.g. it was impossible for Comcast and Suddenlink to both offer cable service to Shreveport customers. The companies determined the prices they would charge those customers. For this legal permission, the companies had to pay a franchise fee to the city in which they operated, usually a particular percentage (set by the city) of gross revenue. The companies hired different types of employees: accountants, HR managers, office staff, etc. whose skills were transferrable to other firms, occupations, and industries; and technicians, electricians, and programmers whose skills were not easily transferrable to other firms, occupations, or industries. The companies purchased land from available plots in the city, and purchased capital equipment some of which, again, was transferable to other firms (computers, desks), and some of which was not (equipment specifically designed for cable provision). How much market power would the individual cable company have in setting the customer price of cable service back then? Select one:
a. Significant power.
b. Moderate or mild power.
c. Little to no power.
2. How much market power would the individual cable company have in setting the city franchise fee back then? Select one:
a. Little to no power.
b. Significant power.
c. Moderate or mild power.
3. How much market power would the individual cable company have in setting the prices of transferable workers and capital back then? Select one: a. Moderate or mild power.
b. Significant power.
c. Little to no power.
4 .How much market power would the individual cable company have in setting the wages of non-transferable workers and capital back then? Select one:
a. Moderate or mild power.
b. Significant power.
c. Little to no power.
Expert Solution
1. How much market power would the individual cable company have in setting the customer price of cable service back then? Select one:
Option a. Significant power is correct.
The reason is that when there are only two companies in the market providing a particular service, they form a duopoly which plays an important role in determining the prices.
2. How much market power would the individual cable company have in setting the city franchise fee back then? Select one:
Option a. Little to no power is correct.
The reason is that the franchise fee is determined by the government.
3. How much market power would the individual cable company have in setting the prices of transferable workers and capital back then? Select one:
Option a. Moderate or mild power is correct.
The reason is that the transferrable assets such as capital and workers depend upon the elasticity of their prices. Even though the firms determine their prices, they have to do so after considering their respective elasticities.
4 .How much market power would the individual cable company have in setting the wages of non-transferable workers and capital back then? Select one:
Option b. Significant power is correct.
The reason is that when the workers are non-transferable, their wage elasticity is 0.
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