1. (a) With the aid of illustrations, show and explain why the perfectly competi
ID: 1108672 • Letter: 1
Question
1. (a) With the aid of illustrations, show and explain why the perfectly competitive industry, unlike the monopolistic industry, is a model of productive and allocative efficiencies. Suppose the per unit cost of producing a good is $20, show and explain why a perfect competitor should or should not produce 5 units for $15 per unit 2. Two firms, say Kmart and Target, have to make a pricing decision. Suppose the firms are confronted with the following pricing matrix rice arge Pric $600 S400 Kma S600 KS10K K S5K rt TS10kTS15k $400 K$15K KS7.5K TS5KT$7.5k (i) Does any of the firms have a dominant or nondominant strategy? Why? (ii) What is the Nash Equilibrium? Why? (iii) Is there a prospect for a collusive pricing outcome? Why? In the light of US antitrust laws, briefly evaluate the impediments to such a pricing strategy. 3. Bonus: You may use the kinked demand model and its limitations to evaluate the arguments for price stability in the oligopolistic structure. INB: QT Review session November 16,2017]Explanation / Answer
1. Perfect competition is a market where there are large numbers of buyers and sellers with homogenous goods and industry is rpice maker rater than firm.
Allocative efficiency is acheived when both consumer's and producer's surplus is maximized. In perfect cmpetition, the marginal cost equals price which gives allocative efficeincy. As when MC equals price neither a consumer nor the producer suplrus can be maximized without taking something from other. Whereas under monopolistic, MC equals MR not price. And generally consumer surplus is not maximized.
Productive efficeincey is achived when output is acheived with minimum average cost. Under perfect competion equilibrium when MCcuts Price, at the same time AC is also minimized. HEnce productive efficeincy is also achived.
Under perfect competition, if Average cost is $20 and the firm produces 5 units then total cost would be as follows:
TC = AC * Q = 20* 5 = $100
And if price is $15 per unit, then total revenue will be :
TR = Price * Q = 15*5 = $75
As TR is less than TC, producing 5 units generates loss. The firm should NOT produce 5 units at $15 price.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.