Question

1. “Under perfect competition, firms satisfy both allocative and productive efficiency: They produce the right quantity of output at the lowest possible cost.” Illustrate this statement graphically, and provide a verbal explanation of no more than five sentences.

2. Assume the market for hamburgers is perfectly competitive. Suppose it is discovered that the beef used in hamburger is infected by dangerous bacteria. Show what will happen to the market for hamburgers in the short run, and then in the long run. Illustrate the short-run and long-run effects using a graph, and provide a verbal explanation of no more than five sentences

3. “A monopolist underproduces and overcharges for its product, thereby imposing costs on the rest of society.” Illustrate this statement graphically, and provide a verbal explanation of no more than five sentences.

4. Market power refers to the ability of a firm to charge a price in excess of marginal cost. The monopoly markup refers to how big is the difference between price and marginal cost. Show that the size of the monopoly markup depends on the elasticity of the demand curve. Illustrate this statement graphically, and provide a verbal explanation of no more than five sentences.

5. Under oligopoly, firms have a collective interest in forming a cartel, meaning the firms behave as a single monopolist. But cartels are unstable: they are very hard to sustain. Why? Explain why collusion among firms frequently breaks down. You do not need a graph.

Answer 1

The perfect competition is the market structure where homogeneous products are produced by the firms. Thus the long run profit in a perfectly competitive market will be zero. The producers in a perfectly competitive market are price takeres and the price and quantity are at the pint where MC=MR.