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Perfect Competition and Other Economic Concepts

Answer all questions in a full and complete manner, providing examples as necessary to fully articulate your view.

1) If the perfect competitor is losing money in the short run, what happens in the market to drive up the price?
2) How does the demand curve faced by the monopolist differ from that conforting the perfect competitor? Why do they differ?
3) In what respects does a monopolistic competitor differ from a perfect competitor? Give examples.
4) Describe ways in which a firm can differentiate its products from those of its competitors? Give examples.
5) The American automobile industry has been an archetypical oligopoly. Show why this statement is true.
6) Explain the cutthroat competitors reasons for not raising or lowering his price, thereby accounting for the kink in his demand curve.
7) What are the basic provisions of a collective bargaining agreement? Explain the differences between meditation and arbitration.
8) Who are the poor in the United States? Why is a single theory inadequate in explaining why we have poverty in the U.S?

Solution Preview

1) if the perfect competitor is losing money in the short run, what happens in the market to drive up the price?
If the perfect competitor is losing money in the short run, it means that the price is lower than the average total cost of the competitor. Now, if the price is lower than the average variable cost of the competitor then he needs to stop production because he is losing his capital. On the other hand if the price is higher than the average variable cost of the competitor he continues production in the short run because there is a positive contribution to the fixed costs. In the market there are several other competitors that find the price to be lower than their average variable cost. These competitors must stop production. The overall effect is that the industry supply-curve shifts to the right. Even though the demand curve faced by individual firms is horizontal, the industry demand curve is downward sloping. This means that the equilibrium for the industry is reached at a higher price. This new equilibrium drives up the prices.
So, even if the perfect competitor is losing money in the short run, if the price is higher than the average variable costs, it is advisable to continue production. This contributes to the fixed costs. In the industry there will be other competitors that will be having higher variable costs and these competitors will be forced to cease production. As the supply decreases the supply curve shifts to the left and the equilibrium for the industry is reached at a higher price than what it was earlier. This "drives up the prices". Remember, even though the demand curve for individual firms in a perfect competition is horizontal, the demand curve for the industry is downward sloping, so if the supply decreases, the new equilibrium point will be reached at a higher price on the demand curve.

2) How does the demand curve faced by the monopolist differ from that confronting the perfect competitor? Why do they differ?
There is an intrinsic difference between the demand curve faced by a monopoly and the demand curve faced by a perfect competitor. The demand curve faced by a perfect competitor is a horizontal demand curve. The reason for this is that there are innumerable competitors and the firm is a price-taker, if the firm charges a higher price it cannot sell any of its products because there is perfect information of price with the buyers, similarly if it charges less than the price it can sell all it wants and get a lower price. So, the firm avoids the situation and instead sells at the prevailing price in the market. Even though the individual firm has a horizontal ...

Solution Summary

This solution answers 8 questions about perfect competition, addressing topics such as the perfect competitor, demand curve, monopolistic competitors and collective bargaining agreements.

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