A Detailed Report on Market Structures and Allocative Efficiency

This economics report provides a detailed analysis of various market structures, including perfect competition, monopolistic competition, collusion, and monopoly, with a focus on allocative efficiency. It explains how perfect competition serves as a benchmark for allocative efficiency, while monopolistic competition and monopoly often lead to inefficiencies. The report also examines the impact of collusion on market prices and output, as well as the consequences of firms cheating in collusive agreements. Furthermore, it discusses the role of taxes as a market mechanism to reduce pollution and analyzes price elasticity of demand and cross-price elasticity to understand the relationships between different goods. The document includes diagrams to illustrate key concepts and is supported by relevant references, offering a comprehensive overview of these economic principles. Desklib provides this document as well as a range of study tools for students.

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ECONOMIC ASSIGNMENT

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Table of contents
1. A.............................................................................................................................................3
1. B.............................................................................................................................................3
2. A.............................................................................................................................................4
2. B.............................................................................................................................................4
3. A.............................................................................................................................................4
3 B..............................................................................................................................................5
4..................................................................................................................................................5
5. A.............................................................................................................................................6
5. B.............................................................................................................................................6
5.C..............................................................................................................................................6
5. D.............................................................................................................................................6
Reference....................................................................................................................................8

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1. A
The allocative efficiency is referred to as the economic situation that the markets present
where it is not possible to make someone better off without making someone else worse off.
For the purpose of benchmarking of ideal allocative efficiency perfect competition is used.
The perfectly competitive market reaches the parato optimality, benefits of which accrue to
both the sellers and the buyers of the market. In the equilibrium of perfectly competitive
market, sellers cannot be made better off without making the buyers worse off and vice versa
(Laibson and List, 2015). Therefore, in comparing the allocative efficiencies of the other
market forms, perfectly competitive market is used as a benchmark.
Figure 1: the allocative efficiency of perfect competition
(Source: Goodwin et al. 2015)
1. B
The main objective of the monopolistically competitive firm is to maximise the profit.
Therefore they produce at a point where marginal revenue equals the marginal costs of the
firm. Apart from that the demand curve of the monopolist competition is also downward
sloping which shows that price determined by the market is always more than the cost.
Therefore, the sellers of the monopolistically competitive firms become successful in
extracting all the consumer surplus of the market.

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Figure 2: Monopolistically competitive firm
(Source: Mussa and Sepulveda, 2016)
2. A
Collusion allows the market players to control the prices collectively. Through collusion, the
market players curb the powers of the buyers of the market. Mallik and Shankar (2016) stated
that, collusion in market works like monopoly. The only difference is that the power over the
prices is divided between the participants of collusion. The participants of collusion fixes the
prices at a level more than the average cost, thus, with the changes in demand, the sellers do
not changes the prices and extracts all the surplus of the market. In the figure 3, a and b
shows the price and the output of individual firms and c shows the price and output after
collusion.
Figure 3: prices and output determination in collusion

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(Source: Friedman, 2016)
2. B
In this case if one firm cheats the other firm and reduces the price of the product in order to
increase the market share, there will be an excess supply in the market. Apart from that, in the
short run, the price level of the market will also fall drastically breaking the collusion among
the participants (Mankiw, 2017). For example if the firm A reduces the price level the
demand will increase the quantity produced and the firm B will face less demand and hence
there will be supply surplus in the market.
3. A
Single seller market refers to the monopoly market structure where the power over the prices
of the market is enjoyed only by the single seller. Monopolies produce at the point where
marginal cost equals marginal revenue in order to maximise profit. However, with the
increase in the production the marginal revenue falls much more than that of the average cost.
This implies that the price level at the market therefore will be more than the average cost of
the firm resulting in P>MC (Long, 2014). Thus, the monopolist will be able to extract all the
surplus of the market leading to low allocative efficiency.
Figure 4: Allocative inefficiency in monopoly
(Source: Long, 2014)

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3 B
There are a number of advantages related to the operation of monopolistic firm. First and the
foremost are the research and development. Monopolist generally earns a lot of revenue from
the market which incentives them to invest in the research and development of the products
that the monopoly sells in the market. Apart from that, the monopoly also allows the producer
to decreases the overall cost using the economies of scale (Hull, 2017). However, due to the
fact that the producers enjoy a lot of power of price, the decreased cost does not generally get
reflected on the price of the product in the market.
Figure 5: the advantages of monopoly
(Source: Friedman, 2016)
4.
Tax can be used as a market mechanism in order to reduce the pollution in the environment.
The tax rate levied on the producers will shift the supply curve to the left. That means with
the tax imposed on the seller they will be able to sale less amount for each given price level.
The resulting decrease in the quantity produced will reduce the pollution. Apart from that the
increase in the price will also reduce the demand further thereby reduction the level of
associated pollution in the environment.

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Figure 6: Taxing the seller in order reduce the externality
(Source: Friedman, 2016)
5. A
As per the data given in the question, the pre- recorded compact disk is an elastic good and
the cabinet mark’s work is an inelastic good. Therefore, an increase in the income of the
consumer of 10% will increase the demand for pre- recorded good by 70% and for the case of
cabinet marks work, the demand will increase by only 7 percent.
5. B
The signs of the cross price elasticity would help in determination of the relationship of the
products. If the cross price elasticity of mp3 player related to the price of compact disk is
negative they are complimentary good otherwise they are substitute.
5.C
YED= +0.6
This value is less than 1 but positive. That means that with increase income the demand for
the good is increasing proportionately lower than the increase in income. Therefore, This
good is a normal good.
YED= -2.6

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The value is negative that means the demand for the good is negatively related to the income
of the customer. As the income rises the demand for that product actually falls and hence this
is an inferior good.
5. D
XED= +064
This value is positive that means with the increase in the price of one good the demand for
the other good is raising. This can only happen if one of the goods can be substituted by the
other good. Therefore this good is substitute to each other
XED= -2.6
In this case the sign is negative that means with the increase in the price of one good, the
demand for the other good decreases. This can happen when the goods considered in the
paper are used together. Therefore the goods are complimentary to each other.

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Reference
Friedman, G., 2016. Book Review: What Every Economics Student Needs to Know, and
Doesn’t Get in the Usual Principles Text.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Principles of
economics in context. Routledge.
Hull, G., 2017. A treatise on political economy. Routledge.
Laibson, D. and List, J.A., 2015. Principles of (behavioral) economics. American Economic
Review, 105(5), pp.385-90.
Long, M., 2014. The Principles from Marshall to Mankiw: Historical Changes to
Methodological Discussion in Introductory Economics Textbooks.
Mallik, G. and Shankar, S., 2016. Does prior knowledge of economics and higher level
mathematics improve student learning in principles of economics?. Economic Analysis and
Policy, 49, pp.66-73.
Mankiw, N.G., 2017. On welfare economics in the principles course. The Journal of
Economic Education, 48(1), pp.27-28.
Mussa, A. and Sepulveda, C., 2016. Determinants of Students’ Performance in Principles of
Economics: The Case of a Commuting Technical College. Proceedings Of the New York
State Economics Association, p.74.