Economics Test Questions

Third Take Home Questions

Question 1: Market power is considered a market failure. Please answer the following questions about market failure.

A) Explain why this is a market failure.

Since resources are limited and not distributed evenly nor used to there fullest potential in a market power that leads to a market failure since the use of resources are inefficient. Market powers over price their products and produce less than the consumer demand at an inefficient level, thus doing more harm to our economy than good.

B) Explain the problems associated with market failure.

The problem with market failure if that it makes the economy efficient. We are producing less for more money, the price does not reflect the cost of production and this

Monopoly is inefficient and serves no social benefit. There is no competition, so the pricing is not regulated ultimately leading to a high price for the product. Price discrimination might occur where the firm sells the same product with different rates to different people in order to increase their profit.

C) How does society manage these problems?

Society manages these problems with antitrust laws, we encourage fair competition in the market to benefit consumers. The government also regulates monopolies with price regulation, especially for the utilities.

D) What is the good aspect of natural monopoly?

Sometimes It's more cost effective to have one mass producer rather than having great competition. For example it is cheaper to have one Public utility server because it is more efficient to build up one utility company were the government can regulate the prices to ensure that both the company and consumers receive their full benefit.

Question 3: The United States has experienced significant increases in the concentration of industry. For example, there are fewer but larger banks now than in the 1980s. What does this imply about the efficiency of our economy and the prospects of increasing our national

The monopoly maximising its profit at the point where MR = MC. There is no supply curve under monopoly because, there is no unique price-quantity relationship, since quantity supplied by a firm under monopoly is not determined by price but in­stead by marginal revenue, given the marginal cost curve

Question 5: Explain how advertising differs amongst the four market structure discussed in class.

Monopolistic competition: advertises similar products with little changes in the packaging and products, because If the product succeeds you try to copy it as closely as possible.

A pure monopoly doesn't need advertising scene there is only one source of the product and it doesn't compete with anyone. Perfect competition has no advertising scene there are no brand names and if one seller lowers the price the rest of the sellers lower their price. Oligopoly there are a few large companies with dependent behavior, there is advertizing sense the companies want to be chosen over the others.

Question 6: Opponents of business taxes argue that business owners simply pass the tax onto consumers. Explain whether or not this makes sense. Explain three specific factors that will impact how much of the tax is passed to customers.

Question 7: Externalities and public goods are market