In a competitive market with large search costs, many firms, and asymmetric information, why is the monopoly price the only possible single-price equilibrium?
What will be an ideal response?
If firms all sell for some price below the monopoly price, then any one firm can benefit by raising price by less than the cost of searching. All firms have this incentive, which disappears when the monopoly price is set. At the monopoly price, any change in price will lower profit.
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Which of the following activities can give rise to a positive externality?
A) Jogging every morning B) Getting a flu vaccination C) Consuming herbal products D) Buying a pair of gloves
In each of the following situations, list what will happen to the equilibrium price and the equilibrium quantity for a particular product, which is an inferior good
a. The population decreases and productivity increases b. Income increases and the price of inputs increase c. The number of firms in the market decreases and income decreases d. Consumer preference decreases and the price of a complement increases e. The price of a substitute in consumption increases and the price of a substitute in production increases