Question

Explain how, when buyers and sellers are rent-seeking competitors, they will ensure that the economic rents...

Explain how, when buyers and sellers are rent-seeking competitors, they will ensure that the economic rents from prices that are too high or too low are competed away to ensure a market-clearing price- quantity equilibrium. Be sure to explain why behaving as a price-taker is therefore a firm’s best response in equilibrium.

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Answer #1

When buyers and sellers are rent-seeking competitors, if the economic rents from prices are too high, buyers decreases their demand which forces rents to decrease. And in case prices are too low, suppliers decreases their supply forcing prices to increase. This ensures market clearing price quantity equillibrium.

Firms behave as a price taker so that other firms cannot enter the market easily and produce a identical product. This makes it difficult for any firm to set its own prices. The other reason is that there is no difference between its product and that of every other product in the market. Since no one will be willing to pay extra, firms cannot get away with setting its prices above the market price.

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