Question

1) Explain the similarities and differences between monopolistically competitive markets, monopolies, and perfectly competitive markets.

2) Does the presence of asymmetric information in a market justify governmental intervention? Justify your answer using economic principles.

3) Explain bargaining power, the factors that determine it, and its impact in determining the outcome of negotiations.

Answer 1

1)

Similarities between monopolistically competitive firms, and perfectly competitive firms in many firms
MR=MC, may be profitable or unprofitable in the short run but not profitable in the long run
free entry/exit in the long run and P=AC in the long run.while similarities between monopolies and competitive markets are P=AR and MR=MC.

Two Main differences between the monopolistically competitive and perfectly competitive firms firm are

a) In the long run, the monopolistic competitve firms produces an output level which is below its efficient scale whereas in a perfectly competitive firm, firms produces an output level which is at efficient scale.

b)

• perfectly competitive firms - price takers while monopolistic competitve firms - market power, monopolies- one firm
• perfectly competitive firms- homogenous products, monopolistic competitve firms- differentiated products
• perfectly competitive firms- P=MC=MR, monopolistic competitve firms- P>MR
• perfectly competitive firms- upward sloping demand, monopolistic competitve firms- downward sloping demand

The monopolistically competitive firms are considered less efficient because in the long run they will produce an output level which is below its minimum ATC level while perfectly competitive firm produces at output level where the P=MC= minimum ATC so its efficient.

2)

In a market with asymmetric information buyers and sellers have different information about the good being traded. The intervention of government is not always needed to deal with the problem of asymmetric information. The information asymmetries also known as information failure are created when one party to an economic transaction possesses greater material knowledge compared to other party.It is normally manifests when seller of a product or service has more knoledge than the buyer,although the reverse can also be possible.

3)

Factors Affecting Bargaining Power of Buye

• Buyer demand is weak in relation to industry supply
• Industry products are standardized
• low switching costs for competing products
• Buyers are large and few compared to sellers
• Buyers are informed on quality, prices, and costs of sellers

The negotiators believes he or she currently has less power than the other party, so they seek power to offset the other's advantage.

The negotiator thinks they need more power than the other party, to secure a desired outcome. Believes that added power is necessary to gain or sustain one's own advantage in the upcoming negotiation.

The ways in which negotiation used as tool are-

• Empath and sympathy - Being sympathetic and empathetic can some times work in negotiation
• By knowing the moods of the other persion
• By being assertive