Suppose there are two market structures: A and B. Market A is characterized by free entry and exit of firms and firms under this structure face a horizontal demand curve. Market B has only one seller. Identify the market structures
Comment on the pricing mechanism, long-run profitability, and social surplus under both market structures.
Firms in Market A face a horizontal demand curve. This implies that the market demand is perfectly elastic and all firms will be price takers. Hence, Market A is a perfectly competitive market.
Market B has only one seller. A market where there is a single seller is a monopoly. Hence, Market B is a monopoly.
Pricing: Firms in Market A will price their products at the marginal cost corresponding to the output sold. The seller in Market B will price its product higher than the marginal cost corresponding to the output sold.
Long-run profitability: Firms in Market A will earn zero profits in the long run, whereas the seller in Market B can earn positive economic profits in the long run.
Social surplus: Social surplus is maximized in Market A, whereas social surplus is not maximized in Market B.
You might also like to view...
According to the 1974 Constitution of the former Yugoslavia, nobody in Yugoslavia owns resources. Being a socialist country, the constitution claimed resources were owned by "society" as a whole. According to the economic way of thinking,
A) their economic problem would be solved. B) resources would finally be used efficiently, because the profit motive would be destroyed. C) people would use Yugoslavia's resources wastefully because they themselves wouldn't have to pay the opportunity cost. D) the central planners would know how to calculate the true values and costs of resource use.
Incentive-based regulatory approaches:
a. are viewed favorably by most economists as a way to control pollution. b. provide less flexibility than the command-and-control approach. c. tend to hurt wealthier people more than poor people. d. require that the government specify certain types of pollution control technology that firms must adopt.