Economics 201 Microeconomics Assignment 3 Spring 2021 Perfect competition.Explain why perfect competition is economically efficient. [1] Economic efficiency happens when MC=MR. If MC>MR the unit’s costs exceeds its value and if MR>MC, the revenue is no being maximised. There is no deadweight loss, so we know that MC=MR and so the market must be … Continue reading “Microeconomics Assignment 3 | My Assignment Tutor”
Economics 201 Microeconomics Assignment 3 Spring 2021 Perfect competition.Explain why perfect competition is economically efficient. [1] Economic efficiency happens when MC=MR. If MC>MR the unit’s costs exceeds its value and if MR>MC, the revenue is no being maximised. There is no deadweight loss, so we know that MC=MR and so the market must be efficient. What is the effect on a market of perfect information? What is your opinion on how realistic this assumption is? Explain your answer. [3] Perfect information makes the market more competitive as consumers will know if a price is above the market price, so it ensures there will be only one market price; they will know the quality of goods (no false claims by advertising). Perfect information also tells entrepreneurs if economic profits (losses) are being made so that they will enter (leave) the market, ensuring that only normal profits will be made. We have more information and more accessible information than at any point in history, we can say that information is very good, however it will never be perfect, we do not know everything. An example might be the economic uncertainty caused by the pandemic. Explain why the demand curve is also the MR curve and the price. [2] MR = price because every unit sold will sell for the same price (so that will be the MR). There is only one possible market price (firms are price takers and cannot control it). This will also be the demand curve as demand represents willing ness to pay, and consumers are only willing to pay this one price (demand is perfectly elastic). If a firm is making economic profits, explain what will happen in the market. Explain how the assumptions of the model help to make this happen. Use graphs to support your answer. [4] For economic profits, p>AC. Given perfect information and free entry into the market, entrepreneurs will know that there is economic profit and so will be able to enter that market to take some of those profits. Once they start to do this, the supply increases (shifting to the right). D&S graphs will show that this causes prices to fall. In the graph of perfect competition, the price/MR curve shift downwards and will continue to do so until p = AC and only normal profits are made. At this point there is no incentive for any more firms to enter the market or they will make economic losses as the price will fall below AC. e) Look at the link for competitiveness in Canada Country/Economy Profiles In the table Most problematic factors for doing business – what is the biggest problem? Explain which of the assumptions of our model this is most likely to affect and why that would make the market less competitive? [2] Several people didn’t look at the table properly and used data for Albania rather than Canada. The main problem was inefficient government bureaucracy. I assumed that this is mostly about regulation and so would affect free entry into the market (I accepted other answers). This could be the requirements for environmental assessments, quotas (fishing, logging), zoning laws etc. etc. It may make markets less competitive as fewer firms can start up (it takes longer and costs more to set up, and there may be limits on the number of firms allowed – liquor stores for example). Just in the interests of balance, this does not mean that we should scrap all these regulations, there are good reasons for them. Less competitiveness may be traded off to gain other benefits. This article dates from 1997 and the beginnings of financial services on the internet (banking and insurance for example) https://www.strategy-business.com/article/8907 Look at the section headed Trouble on the horizon. Explain any two effects of the internet that would make the market closer to perfect competition. [4] Easier switching means that customer will have more choice if the cost (time and effort) of changing accounts is less. This would be equivalent to increasing the number of sellers. Some people argued that this will make banks better substitutes – customers will choose banks on the basis of interest earned and costs they have to pay rather than brand loyalty. This means banks are banks are closer to being identical products. Lower costs to running a bank (being entirely online rather than having to have an expensive building), will also increase the number of banks entering the market. You could argue that this increases the number of sellers (more like PC) and/or it gets the industry closer to free entry and exit (it will not be free exactly but there are fewer barriers to entering the market). MonopolyHow is price determined in monopoly? Why is it greater than the MR? Use your own numerical example. [3] Price is determined were MC=MR (profit maximising output) and the price for this output is taken from the demand curve. In order to sell more goods, the monopolist has to reduce the price. They do not just reduce the price to the new customers, they have to reduce it to all the existing customers too. As a result, for every unit of a good that is sold, the revenue (MR) falls by more than the price. i) Explain what a natural monopoly is in terms of AC, variable costs and fixed costs. [2] Total costs = fixed + variable and AC = total cost/output In natural monopoly, fixed costs are a very large proportion of the total costs – let us assume that variable costs are small enough to be ignored ≈ zero (they are not zero, but it helps to make our point), now we have: Total costs = fixed costs and AC = fixed costs/output. This means that AC fall as output increases (the costs are spread over a larger output) this is the defining feature of a natural monopoly. ii) Does this mean that natural monopolies are efficient? Use a graph to support your explanation. [2] No they are not efficient as there is still a deadweight loss. You can see this if you use the graph of how natural monopolies are regulated. Explain how natural monopolies are regulated. Why is this regulation still less efficient than perfect competition? [2] The best that can be done is to set a price = av. costs. This is not as good as perfect competition as this price will be higher than the perfect competition price where p = MC and there in no deadweight loss. However if we set p=MC in the natural monopoly, because MC are extremely low, then the firm will make an economic loss as p
