Question

Competitive Markets:

Part 1: The high end bicycle market is made up of two types of firms.

On the one hand, there are several small boutique builders, who specialize in making frames from exotic materials (titanium, carbon, alloy, metal matrix, etc), and then specking the bikes with high end components. Many of these firms also custom build the frame to the buyers physical dimensions, and preferred riding style.

There are also some very large firms (Trek, Specialized, Giant, Cervelo) that make high end bikes using mass production techniques. A high end mass produced bike may sell at prices that are higher, lower, or the same as the smaller company’s bikes.

a. Briefly identify this type of market and explain how its possible for big firms and small firms to coexist.

b. Draw a typical boutique shop making an economic profit.

c. Explain how this market reaches a long run equilibrium and list the ways this long run equilibrium is different than perfect competition? Would perfect competition be better for the consumer in this case?

Part 2: Acai berries are the new big antioxidant thing. The berries only grow in the Amazon river basin. Like many agricultural products, Acai is a perfectly competitive market and involves harvesting the berries from the tops of Acai Palm trees.

A. Show the market for Acai berries, and a typical firm in a long run equilibrium.

B. Show and briefly explain how the market/firm would move to a new long run equilibrium if news got out the Acai berries are not organic, or sustainable, or all that healthy.

C. How would the market (and typical firm) be affected if Monsanto developed a genetically modified Acai berry that could be grown in the USA? You need to draw some things, and say some things to answer this.

Part 3: Consider a market with 2 identical firms (a and b). The market demand is P = 14 - Q

where Q = Qa + Qb. For both firms AC=MC= 2.

A. Solve for the Cournot-Nash reaction functions of each firm.

B. Solve for the Cournot- Nash equilibrium. Solve for Q, Qa, Qb, Price, and each firms profit.

C. Compare the Cournot-Nash equilibrium with perfect competition, and monopoly (you can refer to your results from question 2, if you’ve already done it)

Part 4: Explain and show the kinked demand curve theory. What is its weakness?

B. Show and explain the dominant firm model.

C. Why do firms in a Bertrand lower price to MC?

Answer 1

A) oligopoly.. Because in oligopoly few firm produced homogenous and differentiate product. Firm coexist Either by both firm cooperate each other by having same price or make price ceiling not to sell good less than or higher that... If both firm not agree to Co exst then they go for cut throat competition which is harmful for both tha firms

B) economic profit under perfect Competition

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C)

The Long-Run Equilibrium of the Firm under Perfect Competition!

The long run is a period of time which is sufficiently long to allow the firms to make changes in all factors of production. In the long run, all factors are variable and none fixed. The firms, in the long run, can increase their output by changing their capital equipment; they may expand their old plants or replace the old lower-capacity plants by the new higher-capacity plants or add new plants.

The major difference in the long run equilibrium between a market that is in perfect competition and one that is in monopoly is that there will be a lower equilibrium quantity at a higher equilibrium price in an oligopoly. This is because of a lack of competition.

An oligopoly is a market structure in which there are only a very few companies. There are few companies because there are high barriers to entry. In perfect competition, there are very low barriers to entry. This means that when firms start to make economic profit, others will enter the market. In an oligopoly, this is not really possible.

What this means is that the industry supply will be lower than it “should” be in an oligopoly. Simple supply and demand analysis shows us that an industry with lower supply will have (all other things being equal) a lower equilibrium quantity and a higher equilibrium price than an industry with higher supply would. This means that economic profit can be made in an oligopoly where it cannot be in perfect competition. It also means that there will be allocative inefficiency in an oligopoly, but not in perfect competition.