Discuss until July 15, 2018. After the deadline, this link will close. 1. Suppos

Question

Discuss until July 15, 2018. After the deadline, this link will close.

1.      Suppose a firm is operating in a competitive market and is maximizing profit by producing at the point where marginal revenue equals marginal cost. Now suppose that consumer wealth decreases in this market (and the good is a normal good). What might you expect to happen to the profit-maximizing output quantity for the firm?

2. In what ways are profit-maximizing and loss-minimizing the same? In what ways are they different?

3. Suppose that De Beers and the local water utility are both monopolists, in the markets for diamond jewelry and water, respectively. If both monopolies decided to raise prices 15 percent, which monopoly would be more likely to see its total revenue decrease? Why?

4. Until the 1980s, AT&T held a monopoly over the national market for phone services. Suppose that AT&T argued that it was a natural monopoly, because the fixed cost of creating a nationwide phone network generated huge economies of scale, and that there was therefore no welfare loss associated with its monopoly. Counter this argument by explaining how even a natural monopoly causes deadweight loss.  

5. Explain why an oligopolist (with few competitors) pays more attention to what its competitors are doing than a producer in a competitive market (with many competitors) does.  

6. Given that the market for smartphones is inefficient, explain why consumers of smartphones might not want the price to be regulated.  

Explanation / Answer

Ans1) prices in the market would decrease and the firms profit maximising output would decrease. In perfect competition there is free entry and exit of firms meaning firms are free to enter the market and they can exit the market when they wish to so firms earn zero economic profit. Profit is the difference of total revenue and total cost.

Ans2) firm should produce to the level of output where MR=MC, in initial stages of production MC can exceed MR but companies may decide to work through that period

Ans3) De Beers is more likely to see decrease in total revenue Because of increasing prices. Diamonds are considered a luxury good, whereas water is a necessary good. when a good is elastically demanded, increasing prices will cause total revenues to decrease.

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