Question

3. Show graphically and explain why perfect competition leads to welfare maximization.

4. Under what conditions will a perfectly competitive industry be a decreasing cost industry? Under these conditions derive graphically derive the industry’s long-run supply curve.

5. A benevolent alien bestows a cost saving technology on a single firm in a perfectly competitive industry. After the blessed event, the alien leaves Earth never to return. Prior to the technology’s introduction all firms in the industry had identical cost functions and had access to identical technology. All other firms realize that the new technology lowers costs, and know exactly by how much it will do so (i.e. there is no uncertainty about the technologies efficacy). The technology is completely transferable by whoever owns it. Moreover, transference does not result in the technology’s depreciation. Under these assumptions demonstrate that despite having the cost-saving technology the recipient firm is unable to earn long-run economic profits. Since it can’t earn long-run economic profits should the firm even accept the technology?

Answer 1

3)

Perfectly Competitive market is considered as the most optimal market it seeks to produce where demand and supply forces are equal. it is allocatively and productively efficient market.

Following is diagram:

In above diagram, output has been maximized where demand and supply are equal and firms are producing where P = AC or it is most efficient point provided there is no externalities. Hence, perfectly competitive maximizes the welfare.