Question

Classify each of the following businesses by their characteristics. For parts a. through d., write Pure Competition, Pure Monopoly, Monopolistic Competition or Oligopoly. Answer the questions in parts e. through h.
a. Rick owns a Greek restaurant in a small, rural town. There are four other restaurants in town and five other fast food establishments; however, none of the others sell Greek Cuisine. (6 pts.)

b. Katie owns her own research firm. Much by accident she stumbled onto a chemical combination that, when inhaled, cures the common cold in a matter of minutes with no adverse side effects. She has a patent on the new drug. (6 pts.)

c. Ted and Chris own the only two gas stations in a 40 mile radius. When Ted lowers his price, Chris quickly follows because his sales start to fall off very quickly. Ted experiences the same result when Chris decides to lower his price. (6 pts.)

d. Sophia owns a farm and produces wheat. When she takes her wheat to sell it, she can sell her entire harvest, but she has to accept the going price on the market because there are so many other wheat farmers. (6 pts.)

e. In which market structure is there the greatest opportunity for economic profits? (6 pts.)

f. In which market structure(s) are there no economic profits in the long run? (6 pts.)

g. Letâs assume that Monopolistically Competitive firms in a particular industry are earning short-run economic profits. What will happen? What will the end result be? (7 pts.)

h. Why wonât a purely competitive firm earn economic profits in the long run? (7 pts

Posted Feb 13 2019
AnsweredFeb 13 2019
OC2735543
Harvard University
(a) For Greek food, Rick is a monopolist since no other seller of Greek cuisine is there.

But if the market is for restaurants only, Rick has monopolistic competition because there are 9 sellers in the small market, with slightly differentiated products & services.

(b) Monopoly. The patent will make Katie the sole seller of this new drug, as long as she holds the patent.

(c) This is Oligopoly (Duopoly) with price competition, since there are only 2 sellers who lower own price, in reaction to the other's price reduction.

(d) Perfect competition. This market is characterized by the individual company being a price-taker and the existence of many companies on the market.

(e) In monopoly market there is maxmimum scope for economic profits. This is because, unlike other market structures, the monopolist is the single seller and sets its own price. It can even engage in price discrimination to charge different prices in different market segments, based on the segment's demand elasticity, to maximize profits.

(f) In perfect competition and Monopolistic competition, there is no long run economic profits, All firms earn the minimum (Normal) profit only.

(g) A monopolistic competition is characterized by product dfferentiation. The firms need to continue differentiating their product in future, in order to be able to sell. This increases their cost functions. In the long run, the long-term average cost only matches the price, so no economic profits can be made.

(h) In perfect competition, firms earn economic profits in short run. Since this market structure is characterized by the free entry (and exit) of other companies, other companies will be attracted by this short-term economic profit and enter the market competing for the existing market share. This short-term economic profit will therefore be eroded.

Share
Economics

Define price floor. Give an example.

Answered11 Mar
Economics

What do you mean by economies of scale?

Answered22H
Economics

Discuss how the surplus budget impacts the loanable fund market.

Answered23H

Answer 1

Answer:

1. A price floor is a minimum price that is imposed by a government or another agency for a certain good or service. Example: minimum wage.

2.  Economies of scale is the fall in average costs due to expansion.

3. See explanation

Explanation:

1. Define price floor. Give an example.

A price floor is a minimum price that is imposed by a government or another agency for a certain good or service. In order for a price floor to be effective, it should be charged above the equilibrium price. That is, the price point at which the demand and supply are equal. Charging a price below the price floor is an offense and would be treated as such by a legal body. The objective of a price floor is to protect the supplier of the good or service from the price falling too low. It also provides as motivation to increase supply.

One example of a price floor is a minimum wage. The minimum wage is the price that employers are expected to pay for their laborers. in order to cut costs and make high profits, employers may exploit laborers and pay little wages. However, when a price floor is set, regardless of how high the supply of labor is in a period of low demand for labor, the price can only fall up to the minimum wage rate. Paying below this is illegal. Not only does this protect laborers from low wages but it also motivates the people in the economy who aren't working to actively search for work.

2.  What do you mean by economies of scale?

Economies of scale is the fall in average costs due to expansion. When a firm engages in producing a large quantity of goods or services, the fixed costs are spread over a larger quantity of goods and services. For example, if a firm's fixed cost was $100,000 and it produces 20,000 units, then fixed cost per unit is $5. However, if the firm increases its quantity produced to 50,000 units, then the fixed cost per unit would fall to $2. At the same time, it is possible that the firm can also get bulk-buying discounts from its suppliers of raw materials which would also allow variable costs to fall, leading to an even lower cost.

3. Discuss how the surplus budget impacts the loanable fund market.

Investment is a major component of real GDP. If a firm looks to build a new factory or buy a new piece of land and find themselves in short of capital, they will look to borrowing a loan. The market for loanable funds describes how this borrowing occurs.

There is both a supply and demand in any market. In the loanable funds market:

a) Supply: Savings

b) Demand: Borrowings

When there is a surplus budget, there is an increase in the supply of funds. As this causes the supply curve to shift to the right, there is a fall in price (i.e. interest rates) of loanable funds.

People now receive a lower interest on their savings and hence are likely to spend this money in the economy (investment increases, savings decreases).

Thus, in the long-term, when savings are low, there is less available for loanable funds. This causes a shift in supply to the left leading to a rise in price (interest rates) of loanable funds.