29. Depressed by airline prices, a microeconomist got drunk, got in a fight and

Question

29. Depressed by airline prices, a microeconomist got drunk, got in a fight and got arrested. He needed a bail bondsman to get out of jail and noticed this ad ARINEZ F Gwily Joy, your. Let Martinez Family Bail Bonds help you and your family throughout this difficult time by providing our professional around-the-clock bail bond assistance. Bilingual Speaking Agents (English, Spanish, Punjabi.) We treat you like family. He appreciated bail but noticed that the price was well above LR competitive EQ. a. What will happen in the LR if the industry is competitive? b. What departures from competition do you see in this industry? c. How might the firms set prices? d. Which are illegal? e. What else might go wrong for the firms?

Explanation / Answer

a) In long run, more firms will enter the industry. This will increase the supply and increased firms will drive prices down till economic profits are normal.

b) Prices charged are above what is charged in perfect competition. Thus quantity produced is lower. Profit are higher than in perfect competition. The deadweight loss in industry.

c) Firms are charging higher prices higher than a competitive market. Firms are producing at the point where marginal cost is equal to marginal revenue. Plugging value of quantity obtained into demand function gives prices.

d)

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