Deck 10: Price-Searcher Markets With Low Entry Barriers

Question 1

*What keeps McDonald's, Walmart, General Motors, or any other business firm from raising prices, selling shoddy products, and providing lousy service?

Answer 1

The reason behind these companies from rising prices is competition. Competition prevents these companies from providing costly and shoddy products to consumers. Competition ensures that products are low cost and high quality, as this best serves the interest of the consumer. If this were not the case, consumers, who cannot be forced to buy high-cost, low-quality products, would immediately leave these products and start buying other companies' products.

Question 2

"The superiority of the competitive market is the positive stimuli it provides for constantly improving efficiency, innovating, and offering consumers diversity of choice." This quotation is from Alfred Kahn, the architect of transportation deregulation during the 1970s. Evaluate the statement. Is it true? Discuss.

Answer 2

Yes , the statement is true. Competition provides incentive to the producers to constantly innovate, improve efficiency, and offer diversity to consumers, as these strategies allow them to earn higher profits in the short run without losing customers. Although consumers prefer low-priced products, they are willing to pay more for products that are well designed, high quality, and diverse.

Question 3

The accompanying graph shows the short-run demand and cost situation for a price searcher in a market with low barriers to entry.
a. What level of output will maximize the firm's profit level?
b. What price will the firm charge?
c. How much revenue will the firm receive in this situation? How much is total cost? Total profit?
d. How will the situation change over time?

Answer 3

Below is a graph showing the price and output determination under a price-searcher market with a low entry barrier.
a) The firm's profit will be maximized when it sells 30 units of the commodity because it is at that level of output that the profit-maximization condition of marginal revenue
equals marginal cost
is fulfilled.
b) At the profit-maximizing output level the firm will be charging $24.
c) In this situation the firm will earn a
Therefore,
d) Over time, lured by the supernormal profit of $420, new firms will enter the market, reducing the demand for the existing firm. The process will continue as long as the demand curve of the existing firm shifts so much that it becomes tangent to the average total cost (ATC) curve. As a result, the supernormal profits will be eliminated and each firm will earn zero economic profit.

Question 4

Price searchers can set the prices of their products. Does this mean that they will charge the highest possible price for their products? Why or why not?

Question 5

Because price searchers can set their prices, does this mean that their prices are unaffected by market conditions? In price-searcher markets with low barriers to entry, will the firms be able to make economic profit in the long run? Why or why not?

Question 6

*What determines the variety of styles, designs, and sizes of different products? Why do you think there are only a few different varieties of toothpicks but lots of different types of napkins on the market?

Question 7

What do competitive price searchers have to do to make economic profit?

Question 8

What must an entrepreneur do in order to introduce a new innovative product? What determines whether the new product will be a success or failure?

Question 9

Is quality and style competition as important as price competition? Would you like to live in a country where government regulation restricted the use of quality and style competition? Why or why not? Do you think you would get more or less for your consumer dollar under restrictions like these? Discuss.

Question 10

*Suppose that a price searcher is currently charging a price that maximizes the firm's total revenue. Will this price also maximize the firm's profit? Why or why not? Explain.

Question 11

What determines whether corporations, individual proprietorships, employee-owned firms, consumer cooperatives, or some other form of business structure will dominate in a market?
b. What determines whether small firms, medium-size firms, or large firms will dominate in a market?

Question 12

Would our standard of living be higher if the government "bailed out" troubled businesses? If a firm goes out of business, what happens to the firm's assets, workers, and customers? Are business failures bad for the economy? Why or why not?

Question 13

*Suppose that a group of investors wants to start a business operated out of a popular Utah ski area. The group is considering either building a new hotel complex or starting a new local airline serving that market. Each new business would require about the same amount of capital and personnel hiring. The group believes each endeavor has the same profit potential. Which is the safer (less likely to result in a substantial capital loss) investment? Why? Is there an offsetting advantage to the other investment?

Question 14

Is price discrimination harmful to the economy? How does price discrimination affect the total amount of gains from exchange? Explain. Why do colleges often charge students different prices based on their family income?

Question 15

*"When competition is intense, only the big firms survive. The little guy has no chance." True or false? Explain.

Question 16

What is the primary requirement for a market to be competitive? Is competition necessary for markets to work well? Why or why not? How does competition influence the following: (a) the cost efficiency of producers, (b) the quality of products, and (c) the discovery and development of new products? Explain your answers.