Question

WRITE SHORT ANSWERS. No more than 3 or 4 lines

1. In which type of the markets, economic profit driven to zero in the long run and Why? ( 5 Marks )

2. Describe the output and price effects that influence the profit-maximizing decision faced by a firm in an oligopoly market. How does this differ from output and price effects in a monopoly market? ( 5 Marks )

3. Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with the rest of the cartel. Why? ( 5 Marks )

4. Explain the practice of tying and discuss why it is controversial? ( 5 Marks )

Answer 1

1. Perfect competition economic profits are driven to zero in the long run as firms enter the market till supernormal profits are reduced to normal profits.

2. Output and price decisions are determined keeping in mind output and price decision of the competitors and trying to capture maximum market share where as in monopoly market output and price decisions are determined by maximum profit earning motive of producers.

3. Firms which collude in an oligopoly market face a prisoner's dilemma where undercutting other firm ' s market share would maximize revenue for a particular firm. Therefore firms may choose to cheat on their agreement with rest of the cartel

4.The practice of tying is illegal because it adds additional pressure on consumers to purchase a complementary product and thus distorts consumer choices, from a consumer protection stand point tying is illegal