Question

In: Economics

1. Analyze the effects an entrant barrier. Consider a situation of partial equilibrium. In particular, suppose...

1. Analyze the effects an entrant barrier. Consider a situation of partial equilibrium. In particular, suppose everyone is a price taker. Suppose there are some firms who cannot enter into the market by the barrier. Using graphs, answer the following questions

(a) How do supply curves in two situations—with and without barrier— look like?

(b) Show the dead-weight loss coming from the barrier

Solutions

Expert Solution

Answer to question no a :-

Supply determination when there is no barrier to entry :-

When there is no barrier to entry , the firm decides to supply at a price where MC = MR .

In the above graph , P is the product price of oligopoly ,as all are price takers ,if the price setter firm raises it's price to D1 , then this firm will not increase its price to avoid loss of customers which will purchase less at high prices .

However if the price setter firm lowers it's price to D2 , all other firms will lower their prices to avoid loosing market share .

Thus the firm will keep selling at D1 till the marginal cost is between MC1 and MC2 .

However as soon as price goes to D2 , all other firms will change their supply prices to D2 .

Answer to question no b :-

Supply curve when their is barrier to enter :-

If firms in an oligopoly collude and form a barrier to entry of new firms then after forming a cartel they will try to fix prices at a level which maximises their level .

In the given figure , the equilibrium price is set at PC and equilibrium quantity is set at Qc .

But to earn super normal profits, the firm will increase their prices to pm . As a result the quantity of goods will fall in the market .

This welfare loss directly impacts the customer .The shaded area in the following diagram represents dead weight loss to customers.


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