ECON11026 Assignment: Market Structures, Price Discrimination Analysis

This economics assignment provides a detailed analysis of market structures, price discrimination, and externalities. It covers perfect competition, monopoly, and oligopoly, explaining concepts such as price takers, normal profits in the long run, and upward-sloping supply curves. The assignment also discusses the rationale behind government allowance of monopolies in essential services like water and electricity, legal and economic barriers to entry, and different degrees of price discrimination. Furthermore, it examines the kinked demand curve in oligopoly, profit maximization, and the impact of externalities, including potential government interventions through taxes and regulations. Desklib offers this solution along with a wealth of study resources for students.

Running head: ECONOMICS ASSIGNMENT 1
Economics Assignment
Name
Institution

ECONOMICS ASSIGNMENT 2
Economics Assignment
Q1
(a)
In a perfectly competitive market setting, a firm is a price taker as it cannot have any say
in setting the prices of its goods and has merely to accept the market price. According to
Agarwal (2017), there are two key reasons why a firm cannot get away with fixing its price
above the market price. First, there is no variance between its merchandise and that of each other
firm in the market. As a result, no single customer would be willing to pay additional costs for
the firm’s merchandise. Second, if a firm were to make it in fixing a higher price, more firms
would enter the market, enticed by the higher profits that are available. This would rise supply
and drive down the cost of the firm’s merchandise.
(b)
In the long run according to Agarwal (2017), no any single factor of production is fixed
(all are variable) and there are free entry and exit of firms. Thus, firms making an abnormal
profit, in the long run, will entice new firms which would enter freely. This would raise the
industry supply (the supply curve would be made to shift to the right) and thus lower the industry
price. Consequently, new firms will stop arriving in the market once current firms make zero-
economic margins.

ECONOMICS ASSIGNMENT 3
Figure 1: Long-run curve in a perfectly competitive market
Source: www.intelligenteconomist.com
Contrary, firms supplying making losses or operating at break-even point will
exit the market as it is not able to withstand competition in the market thus cutting industry
supply (shift the supply curve to the left) (Pettinger, 2016). This will increase the industry price.
Firms will continue exiting the market until those left behind make the normal profit again. Thus,
all firms in perfectly market make a normal profit.
(c)
In a perfectly competitive market setting, a firm supplies a product at a point in which
marginal cost (MC) equals the price (Seth, 2015). If the price exceeds MC, it motivates the firm
to raise its output level to equal its price. Conversely, if the price below (is less than) MC, it is
making losses. As a result, it will decrease its production (output) until the level at which price
will be equal to MC (Seth, 2015). Thus, in perfect competition, the MC curve is the firm's supply

ECONOMICS ASSIGNMENT 4
curve. Since the MC curve is upward sloping due to the law of diminishing marginal returns, the
firm's supply curve is also upward sloping.
Figure 2: Supply curve of a perfectly competitive firm
Source: http://www.economicsdiscussion.net
Q2
(a)
Most governments across the world permit monopoly firms to continue the supplying
water and electricity to the public since MC of supplying to an extra consumer is very minimal,
after the fixed outlays of the entire system have been settled. (Pettinger, 2016) For instance, once
the main water pipes are placed in a locality, the MC of supplying water to another household is
fairly low.

ECONOMICS ASSIGNMENT 5
Likewise, once power cables are mounted through an area, the MC of supplying
electricity to a new household is very minimal. Briefly stated, it would be costly and duplicative
for a second provider of water or firm to enter the market and invest in an entire second set of
main water pipes, or electricity lines (Pettinger, 2017). These industries provide an ideal case
where, due to economies of scale, one manufacturer can attend to the whole market more ably
than many smaller manufacturers that would be required to make replica physical capital
investments.
(b)
Monopolies often obtain their market power from several and different barriers to entry.
First, they make sure they control the vast proportion of natural resources. For instance, De Beers
own the most significant share of the diamond reserves in the entire world, permitting only
specific fractions of diamonds to be extracted each year and thus the reason for the higher price
of diamonds. Second, setting up of these monopoly firms require high capital outlays. Some
production systems often necessitate substantial investments in equity and expansion outlays
which make it hard for new firms to enter the market. Examples include space transport,
pharmaceuticals, steel production. Third, monopolies also benefit from economies of scale.
According to Lumen Candela (n.d.), monopolies experience declining costs with increased
production levels. Falling costs alongside huge setup outlay give monopolies a cost-plus in
production over would-be competitors as they have not yet attained economies of scale.
Fourth, legal barriers also create a monopoly of goods and services. Intellectual property
rights, for instance, copyright, patents, etc., gives the rights of ownership for the manufacturing
and sale of particular products. Lastly, government backing also helps firms to monopolise the

ECONOMICS ASSIGNMENT 6
market. In many nations, the collective government monopolies are witnessed in public goods
like hospitals, schools, railroads, telecommunications systems, etc.
Q3
(a)
Price discrimination happens when different customers are made to pay different prices in
separate markets for the same supplies, or when the same purchaser is obliged to pay different
prices for the same goods and services, and the different prices are not owing to differences in
supply charges (Alkas Blog, 2011). For price discrimination to be sufficient, three conditions
must hold. First, the market must have some imperfections or monopoly power so that suppliers
can make instead of taking the market price. Second, the discriminating supplier can split the
market into distinct segments and keep them separate, so that it is hard to transfer its products
from one person to another. Lastly, the price elasticity of demand in every single market must be
different.
First-degree price discrimination happens when a business charges a different price for
each unit consumed (Pettinger, 2017). Examples of first price discrimination include age
discounts, coupons, retail incentives, occupational discounts on financial aid and gender-based
pricing. Third-degree price discrimination entails charging a different price to different customer
groups (Pettinger, 2017). For instance, tube and rail travellers can be split into casual and
commuter travellers, and cinema-goers can be divided into children and adults. Another example
is people booking seats with a particular airline, could be charged differently based on travel
history, often flyer involvement and whether the trip is proposed for leisure or business.

ECONOMICS ASSIGNMENT 7
(b)
(i)
Two assumptions are made in this scenario. First, if the leader company (say Company A
in this case) lowers its price below the normal market price, i.e. $ 185, the follower (B in this
case) will also drop its prices. Company B will not like to lose market share if company A
decreases its price. Therefore, the price decrease will be matched; the demand for company A
will be highly elastic below $180. The second assumption is that if company A raises its price
above the market price, company B will keep its price at $ 185. If company A price increases, we
can assume that company B will capture much of the market share since company B’s price
remains low.
Figure 3 : Oligopoly Kink Demand Curve
MR
Price or Cost (dollars per unit)
MC2
MC1
MC3
Company A demand Curve
0 Quantity (units per period)

ECONOMICS ASSIGNMENT 8
Source: student
(ii)
The above two assumptions still holds for this part. The calculations are obtained as
follows:
 TR of the follower; this is delivered by multiplying the output of the follower by
respective prices. The assumption made here is that for where Company’s A price is
above the market price which is $185, Company B will keep $185 as its price. When
Company A lowers its price below $185, Company B will also lower hers. If Company A
keeps its price at $ 185, Company B will also keep this price.
 The marginal revenue (MR) is calculated as the change in total revenue divided by the
change in output demanded.
Table 1: TR and MR
1 2 3 4 5 6 7 8
Competito
rs
Quantity
Demanded
Price
($)
(Leade
r)
Total
Revenu
e
(leader
)
Competito
rs follow:
Quantity
Demanded
Price ($)
(followe
r)
Total
Revenue
(followe
r)
Margin
al
Revenu
e (MR)
Margin
al Cost
(MC)
20 200 4000 35 185 6475 0 150
30 195 5850 40 185 7400 185 150
40 190 7600 45 185 8325 175 150
50 185 9250 50 185 9250 165 150
60 180 10,800 55 180 9900 155 150
70 175 12,250 60 175 10500 145 150
Source: student
(iii)
Profit will be maximized = (P-AVC)* maximum quantity demanded

ECONOMICS ASSIGNMENT 9
P-$ 185
AVC in this case is 150 (as the marginal cost is constant)
Maximum quantity demanded-50
Thus, maximum profit is given by (185-150)*50=$1500
Represented in graph;
Figure 4: Maximizing Company’s Profit.
Source: Student
* An image was captured after drawing the graph as group of all the variables is distorting the
shape of the graph

ECONOMICS ASSIGNMENT 10
Q4
(i)
The firm will produce 5 units of output based if it seeks to maximize profits. This is because the
profit will be maximized where MR equals MC which in this case is 27.
(ii)
The socially efficient level of output is 4 where MSB=MSC=AR which is 42.
(iii)
Table 2: Marginal External Cost
Output MC MSC MEC
1 23 35 12
2 21 34 13
3 23 38 15
4 25 42 17
5 27 46 19
6 30 52 22
7 35 60 25
8 42 72 30
The marginal external cost at this level of output is 25.
(iv)
The government will set the necessary tax at any point where MSC>MSB i.e. above 42
(b)
(i)

ECONOMICS ASSIGNMENT 11
Yes. Both positive and negative externalities. For positive externality, the risk of being
infected by vaccinated people is very low compared to the unvaccinated people. For the negative
externality, if the used injection needles and cylinders containing the vaccination content are not
disposed of well they would pollute the environment. The used materials could also hurt people
either by inflicting cuts and other physical injuries.
(ii)
Yes. A negative externality. Plastic bags are non-biodegradable and thus will interfere
with the ecology.
(iii)
For negative externality in (i) above, the government may reduce the externalities by
imposing strict fines on individuals who are caught carelessly discarding the used vaccination
materials. For (ii), the government may totally ban the use of plastics to prevent these
externalities.

ECONOMICS ASSIGNMENT 12
References
Agarwal, P. (2017, December 10). Perfect Competition Long Run | Intelligent Economist.
Retrieved from https://www.intelligenteconomist.com/market-structure-perfect-
competition-long-run/
Alkas Blog. (2011, January 26). 'Explain the necessary conditions for price discrimination to
take place. 'Discuss the advantages and disadvantages of price discrimination for
consumers and producers.? Retrieved from
https://12onoal.wordpress.com/2011/01/25/explain-the-necessary-conditions-for-price-
discrimination-to-take-place-%E2%80%9Cdiscuss-the-advantages-and-disadvantages-
of-price-discrimination-for-consumers-and-producers/
Lumen Candela. (n.d.). Barriers to Entry: Reasons for Monopolies to Exist | Boundless
Economics. Retrieved from
https://courses.lumenlearning.com/boundless-economics/chapter/barriers-to-entry-
reasons-for-monopolies-to-exist/
Pettinger T. (2016, October 28). Natural Monopoly - Economics Help. Retrieved from
https://www.economicshelp.org/blog/glossary/natural-monopoly/
Pettinger T. (2017, March 16). Examples of Price Discrimination - Economics Help. Retrieved
from https://www.economicshelp.org/blog/7042/economics/examples-of-price-
discrimination/
Seth T. (2015, August 14). Short-run and Long-run Supply Curves (Explained With Diagram).
Retrieved from http://www.economicsdiscussion.net/articles/short-run-and-long-run-
supply-curves-explained-with-diagram/1677