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Perfect Competition and Other Economic Concepts

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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?

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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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Monopoly Concepts and other Competition related concepts

A natural monopoly exists whenever a single firm ______.
is owned and operated by the federal or local government
is investor owned but has been granted the exclusive right by the government to operate in a market
confronts economies of scale over the entire range of production that is relevant to its market
has gained control over a strategic input of an important production process

Marginal revenue for a monopolist is ______.
equal to price
greater than price
less than price
equal to average revenue

In a monopoly in the long run ______.
economic profits will be eliminated by the entry of rival firms
economic profits will be reduced, but not eliminated entirely, by the entry of rival firms
entry will not occur
none of the above is true

In monopoly _______.
because P > MC, a basic condition for efficiency is violated
consumers are confronted with a price that is lower than marginal cost
consumers will consume more of the good than is economically efficient
all of the above are true

To practice effective price discrimination, a monopolist must be able to ______.
estimate its own production and cost functions
avoid detection by government regulatory agencies
prevent the resale of goods among groups of buyers
calculate the utility level of each buyer in the market

A concentration ratio is used to measure ______.
efficiency
diseconomies of scale
marginal cost
market dominance

If the only two firms in an industry agree to fix the price at a given level, this is an example of ______.
collusion
satisfying
price extortion
price leadership

When firms openly agree on price, output, and other decisions aimed at achieving monopoly profits, those firms are practicing ______.
overt collusion
tacit collusion
leadership price
competitive game

A cartel is an example of ______.
price extortion
price leadership
overt collusion
tacit collusion

A dominant strategy equilibrium exists in a game when ______.
every player has no choice
every player makes the same choice, regardless of the action of the other players
each player makes the best choice, given the choice of the other player
no player is able to dictate the actions of any other player

When one firm responds to a rival's cheating by cheating and to a rival's cooperation by cooperating, that firm is practicing a ______.
dormant strategy
trigger strategy
conclusive strategy
tit-for-tat strategy

An industry characterized by many firms, producing similar but differentiated products, in a market with easy entry and exit is called ______.
perfect competition
monopoly
monopolistic competition
oligopoly

In large shopping areas, the retail market is most illustrative of ______.
monopolistic competition
monopoly
perfect competition
perfect oligopoly

A feature of monopolistic competition that makes it different from monopoly is the ______.
fact that firms in the model of monopolistic competition follow the marginal decision rule while monopolies do not
downward-sloping demand curve
downward-sloping marginal revenue curve
number of firms in the industry

Product differentiation under monopolistic competition means that each firm ______.
charges the same price
maximizes profit where MC = P
faces a downward-sloping demand curve
receives economic profits

Product differentiation under monopolistic competition means that each firm ______.
charges slightly different prices
has a pure monopoly
maximizes profit where MC = P
faces a horizontal demand curve

Monopolistic competition within an industry results in ______.
overutilization of plants
chronic excess capacity
less advertising than in perfect competition
lower prices than in perfect competition

Critics of advertising argue that it ______.
tends to make markets more perfect
leads to low-cost mass production
results in higher prices to consumers
encourages competition through new-product advertising

If an activity generates external costs, decision makers generating the activity will ______.
be faced with its full costs
be faced with no costs
not be faced with its full costs
be faced with excessive costs

A tax system _______ when it minimizes the direct and indirect costs to the economy of tax collection.
is efficient
is equitable
has no deadweight loss
is both A and B

Criteria that economists use in selecting a tax system include ______.
ability to pay and benefits received
fairness
only benefits received
only ability to pay

Sales taxes are considered to be ______.
proportional
progressive
degressive
regressive

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