In each of the following situations, do you think the industry described will be
ID: 1122910 • Letter: I
Question
In each of the following situations, do you think the industry described will be perfectly com- petitive or not? Explain your answer. a. There are two producers of aluminum in the world, a good sold in many places. b. Only a handful of companies produce natural gas from the North Sea. The price of natural gas is determined by global supply and demand, of which North Sea production represents a small share. c. Dozens of designers sell high-fashion clothes. Each designer has a distinctive style and a loyal clientele. d. There are many baseball teams in the United States, one or.two in each major city, and each selling tickets to its events. Which of the following events will induce firms to enter an industry? Which will induce firms to exit? When will entry or exit cease? Explain your answer. a. A technological advance lowers the fixed cost of production of every firm in the industry b. The wages paid to workers in the industry go up. c. A change in consumer tastes increases demand for the good. d. The price of a key input rises due to a shortage of that input.Explanation / Answer
First question
a. It is not perfect competition. It is duopoly with only two sellers
B. Perfect competition because North Sea product is only small share of total market, and supply and demand determine prices. The firms are price takers
C. Not perfect competition. It is rather monopolistic competition in which there is differentiation of products and loyalty of customers
D perfect competition as there are many baseball teams
Question 2
A will lead to entry as high fixed cost is barrier to entry
B will lead to exit as marginal firms will suffer loses
C will lead entry as increased demand mean more economic profits
D will lead exit as once again marginal firms will suffer loses due to higher cost
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