Answered: Perfect Competition: What are the key…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Perfect Competition:

What are the key features of a perfectly competitive market?

Many buyers and sellers
Undifferentiated products
No transaction costs
No barriers to entry and exit
Perfect information about the price of a good

Will a perfectly competitive firm automatically close its doors if it is not making a profit? Why or why not? Make sure to discuss the different time frames.

Yes it will because if the market price that a perfectly competitive firm faces is below average variable cost at the profit maximizing quantity of output then that is not good.

Suppose that you are the manager of a company that vaccinates human beings for biological diseases. Your company uses two inputs to produce vaccinations: physicians and laboratories. However, this is a short-run analysis where physicians are variable but laboratories are fixed. Suppose that each physician costs $500 per day (for an annual salary of about $175,000) and the daily cost for the laboratory is $1,500 (for rental cost of about $547,500 per year). In the short run, your company has 1 laboratory. The following table presents potential daily production levels with requisite input combinations.

Physicians	Laboratories	Vaccinations (Q)	TC	TFC	TVC	MC	ATC	AFC	AVC
0	1	0
3	1	1
5	1	2
6	1	3
9	1	4
15	1	5
24	1	6
36	1	7
51	1	8

Suppose the industry for vaccinating humans is perfectly competitive, and that all companies have production functions and cost functions that are identical to yours. Also, assume that the market price for a vaccination against biological diseases is $6,500.

How much output should your company produce per day in the short run to maximize profits?
At this output level, how many physicians do you hire?

Monopoly:

Briefly explain what is meant by the term "barriers to entry" and provide example of each.
Briefly explain how a natural monopoly arises.
The following table shows a monopolist’s demand curve and cost information for the production of its good. What quantity will it produce? What will its profits be?

Quantity	Price per Unit	Total Cost
10	$10	$20
20	$8	$50
30	$6	$65
40	$4	$90
50	$2	$120

Briefly contrast perfect competition and monopoly to explain a monopoly may or may not display productive efficiency.
Monopolistic Competition and Oligopoly

Briefly discuss how differentiated products in a monopolistic competitive framework can arise.
Briefly describe what an oligopoly is, as well as the circumstances that could allow oligopolists to earn their highest profits.
Identify and briefly discuss the ways to conceive how advertising works in the framework of monopolistic competition.
What is a cartel? What examples of a cartel can you think of?

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