1.The Marquee Theater is the only movie theater in Whitefish, Montana. The nearest rival movie theater, is 50 miles away in Polson. Thus, Marquee Theater possesses some degree of market power. Despite having market power, Marquee Theater is currently suffering losses. In a conversation with the owner of the Marquee, the manager of the movie theater made the following suggestion: "Since Marquee is a local monopoly, we should just increase prices until we make enough profit."

a.Comment on this strategy.

Proposed answer: The good offered here is considered a recreational good and more elastic. Accordingly, a change in price will likely result in less consumer demand which will result it increased losses. Although Marquee possesses some market power in this area, it does not possess monopoly power (the ability to raise its price without losing its sales).

b.How might the market power of the Marquee Theater be measured?

Proposed answer: Market power is related to the availability of substitutes. In the case, the only substitute is 50 miles away. You could assess market power using the Lerner index which measures the proportionate amount by which price exceeds marginal cost.

A firm's ability to raise its price without suffering a substantial reduction in sales is inversely related to the price elasticity of demand. The less elastic the demand, the greater the degree of market power of the firm.

To achieve an accurate measure of market power, the scope of the market must be accurately defined. Considering LIFO and LOFI, it can be stated with a fair degree of certainty that Marquee does possess a fair degree of market power.

c.What options should the Marquee Theater manager consider in the long run?

Proposed response - not sure if this is correct and now I am getting twisted...

The Marquee should choose a strategy at which long-run marginal costs equals marginal revenue.