Answer to Question #195388 in Economics for Jafar suleiman

Question

1.“One might expect firms in a monopolistically competitive market to experience greater swings in the price of their products over the business cycle than those in an oligopoly market. However, fluctuations in profits do not necessarily follow the same pattern.”

Discuss this statement.

2. Which oligopoly model(s) result in long-run oligopoly market equilibrium that is identical to a competitive market price/output solution?

3. Why is the four-firm concentration ratio only an imperfect measure of market power?

4. The statement “You get what you pay for” reflects the common perception that high prices indicate high product quality and low prices indicate low quality. Irrespective of market structure considerations, is this statement always correct? Explain your choice.

Answer 1

1. Fluctuations in profits of monopolistically competitive firms do not necessarily follow the same pattern, because their profits don't depend on the price strategies of other firms in the market like in oligopolistic market.

2. Cournot model results in long-run oligopoly market equilibrium that is identical to a competitive market price/output solution.

3. The concentration ratio only indicates the competitiveness of the industry and whether an industry follows an oligopolistic market structure.

4. This statement is not always correct, because in case of adverse selection as a result of imperfect information the price may be high, but the quality low.