Answer to Question #204695 in Macroeconomics for jason

Question

There are 1000 people living in a small seaside village; 250 of them are potato farmers and 250 are fishermen. The people in the village enjoy a balanced diet of fish and chips. However, a resident vegetarian has convinced people to eat more potatoes and the demand for potatoes has risen. Due to the increased demand, many fishermen have sold their fishing businesses and become potato farmers; there are only five fishermen left with all the fishing equipment. The remaining fishermen are also thinking about becoming potato farmers. An economist has been observing the situation and advises the five fishermen not to become potato farmers but rather to form a single fishing firm, she tells them that they will thank her later.

Given your understanding about market structures, explain what the economist has observed and why she is making that specific recommendation to the fishermen.

Answer 1

Solution:

The economist has observed that the fish market is dwindling since all the fish producers are turning into potato producers. Therefore, this means that the potato market will turn into a monopolistic market structure, where many small producers exist selling the same product, which is potato, and competing against each other. As such, the fish market will experience a huge vacuum, since there will no or fewer fishermen to harvest fish.

 

Therefore, the economist has recommended the few remaining fishermen form one fishing firm to form a monopoly market structure and take advantage of the vacuum in the market. This is because, consumers will consume too much potato in the long run and get tired of eating them, therefore they will demand fish to have a balanced diet. The demand for fish will increase and consumers will start purchasing more fish from the single fish selling firm.

The single fishing firm operating as a monopoly will be a single seller, controlling the market as well as the price maker, with no competition. The firm will be able to maximize its profits by selling at the prices they set and make super-normal profits in both the short-run and long run.

If the five fishermen heed the advice of the economist, they will be able to gain more in terms of more revenues and profits.