Question

 

1. Which market structure results in an efficient outcome and why?

2. Since a perfectly competitive firm can sell as much as it wishes at the market price, why can the firm not simply increase its profits by selling an extremely high quantity?

3. Business is booming at the local McDonald’s restaurant. It is contemplating adding a new grill and french-fry machine, but the day supervisor suggests simply hiring more workers. How should the manager decide which alternative to pursue?

4. ALCOA does not have the monopoly power it once had. How do you suppose their barriers to entry were weakened?

5. A monopoly firm is free to charge any price it wishes. What constrains its choice of a price?

6. Many manufacturers of clothing and other consumer goods open stores in outlet malls where they charge much lower prices than they charge in their own stores located within cities. Outlet malls are typically located a considerable distance from major metropolitan areas, and stores in them typically charge much lower prices than do stores located within cities. Given that both sets of stores are often owned by the same firm, explain this price discrimination based on likely differences in the price elasticity of demand between consumers in the two types of stores.

7. Aside from advertising, how can monopolistically competitive firms increase demand for their products?

Answer 1

1. Perfect competition is a good market structure that does an efficient allocation of resources. This efficiency is achieved because the profit-maximizing quantity of output produced causes price and marginal cost equal. In this type of market, it is customers are expected too have enough information. Firms in a perfectly competitive market must adhere to certain aspects of the market to remain profitable.

2. Firms cannot simply increase its profits by selling an extremely high quantity simply because marginal and average cost increases with increasing productivity.

3. I think purchasing a new machine would work better since it is a one time investment and It will also increase ROIC but there will be no change in ROIC if they hire new employees.

4. There are economic barriers that doesn't allow new entrants to enter a market. Some of the main factors that doesn't allow competitors to join the industry are legal, technological or financial factors.

Reasons why ALCOA's barrier to entry became weak;

After so many years of ALCOA's successful monopoly, it was charged illegal monopoly and thus was taken to the court. The judge announced that it should allow other similar companies to enter the market as well. This weakened ALCOA entry.

5. Businesses set prices for their goods and services by studying and researching about supply and demand. The main aim of companies is to make profit.

7. Monopolistically competitive firms increase demand for their products by product differentiation. They can simply make different products that separate them from other firms.