Question

please answer the following question on the bottom. thank you.

4. Why is the mix of output produced in competitive markets more desirable than that in monopolistically competitive markets?

5. Prior to 1982, AT&T kept local phone rates low by subsidizing them from long-distance profits. Was such cross-subsidization in the public interest? Explain.

6. Why is there resistance to (a) local phone companies providing video and data services and (b) mergers of local cable and telephone companies?

Answer 1

Sol of (4) :

Competitive market means perfectly competitive market where the price is the lowest(P=MC) and the product is homogeneous, there is full information and free market entry to assure the lowest price and cost even in the long run.

If P=MC, it will not be an excess cost and production. It will achieve both production and allocation efficiency.

Monopolistic competition means more buyers and sellers,but they are not price taker, they have power to raise price. The products are different in eyes of consumers but closely substitute. The price will be higher than MC even in the long run.

Sol of (5) :

I believe that cross subsidization is in public interest. By offering higher prices for longer distance, AT & T was able to provide lower cost for local calls.The marginal cost is to make a local phone call is extremely low, instead of making a large profits off of local calls, they choose to keep them low and increase prices on long distance calls.

Sol of (6) :

(a). Because the cable companies don't want to be a competition with them.

(b). When telephone companies merge, there is less competition and eventually higher rates. since they are high entry barriers to get into telephone company, merger companies gives us fewer options.