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 case of competitive industry, in the long run prices will fall to the lowest point of the long run average total cost of the firm. Thus, firms will be earning normal profits as price and average cost are equal and the firm is operating at minimum efficient scale.

b. The price in this industry is very high as compared to competitive industry as airlines generally operate in oligopolistic market structure with restricted entry.

c. In this industry, profit maximization is the goal of the firm. The prices are set based on the prices of rivals. Thus, strategy plays an important role in this type of market structure. Prices also depend on the prices set by rivals. When firms collude they can earn high profits.

d. This is not illegal. It depends on the form of market structure.

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