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2. What is a perfectly competitive market? (in terms of firm behaviour)

2. What is a perfectly competitive market? (in terms of firm behaviour)

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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PLEASE ANSWER QUESTION 2

Section one-theory A: Key concepts 1. What is a Pareto improvement? Give a short example. 2. What is a perfectly competitive market? (in terms of firm behaviour) B: Theory: Market power Terminology: diminishing returns to scale (DRS), constant returns (CRS), increasing returns (IRS) 3. A firm with positive fixed costs encounters CRS and then DRS as it expands production. Show the firm's marginal costs, average variable costs, and average costs in a suitably labelled graph. (careful...) 4. We are in a perfectly competitive market, in which all firms are identical. Market demand is downward sloping. a. Draw the market supply, demand, and equilibrium. b. At present, our firm is producing new widgets for £1.15 and the market price is £2. Is the firm maximising profits? Is the firm in profit or loss? 5. Our firm is now a monopolist facing the same downward-sloping demand curve. What happens to price and quantity produced? Explain. Section two-theory and policy C: Disruptive technology Estate agents help sellers advertise their home for sale to potential buyers. At present, estate agents operate in a perfectly competitive market, at LR equilibrium. 6. A large number of new estate agents (with the same technology as existing firms) enter the market. What is the effect on output, price, and profits in the short-run? How about the long-run? 7. A well-known internet company (WKIC) quietly launches an internet service in which people can find houses. The WKIC has considerably lower average costs than traditional estate agents. What is the effect on output, price, and profits in the short-run? How about the long-run? (Assume that the offering of the WKIC can be duplicated.)
Transcribed Image Text:Section one-theory A: Key concepts 1. What is a Pareto improvement? Give a short example. 2. What is a perfectly competitive market? (in terms of firm behaviour) B: Theory: Market power Terminology: diminishing returns to scale (DRS), constant returns (CRS), increasing returns (IRS) 3. A firm with positive fixed costs encounters CRS and then DRS as it expands production. Show the firm's marginal costs, average variable costs, and average costs in a suitably labelled graph. (careful...) 4. We are in a perfectly competitive market, in which all firms are identical. Market demand is downward sloping. a. Draw the market supply, demand, and equilibrium. b. At present, our firm is producing new widgets for £1.15 and the market price is £2. Is the firm maximising profits? Is the firm in profit or loss? 5. Our firm is now a monopolist facing the same downward-sloping demand curve. What happens to price and quantity produced? Explain. Section two-theory and policy C: Disruptive technology Estate agents help sellers advertise their home for sale to potential buyers. At present, estate agents operate in a perfectly competitive market, at LR equilibrium. 6. A large number of new estate agents (with the same technology as existing firms) enter the market. What is the effect on output, price, and profits in the short-run? How about the long-run? 7. A well-known internet company (WKIC) quietly launches an internet service in which people can find houses. The WKIC has considerably lower average costs than traditional estate agents. What is the effect on output, price, and profits in the short-run? How about the long-run? (Assume that the offering of the WKIC can be duplicated.)
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