1.

Explain the key difference between perfect competition and monopolistic

competition.
→ Nature of firms: In perfect competition, firms produce identical
goods, while in monopolistic competition, firms produce slightly different
goods.
→Nature of Price and Output: Under perfect competition price is equal
to marginal cost as well as marginal revenue whereas under imperfect
competition it is not so. Although, under monopolistic competition
marginal cost and marginal revenue are equal yet not equalizing the price.
→ Nature of Profits: Under monopolistic competition firms get super
normal profits only in the short period. But, in the long run the existence
of super-normal profits disappears. It is so because in the long period
price becomes equal to average cost of production. In case of perfect
competition, the situation is slightly different.
→Nature of Product: Under perfect competition, firms produce
homogeneous products. The cross elasticity of demand among the goods
is infinite. Under imperfect competition, all the firms produce
differentiated products and the cross elasticity of demand among them is
very small.
Another point of difference between the monopolistic and perfect
competition is regarding the selling costs. Under perfect competition,
homogeneous goods are produced and are sold at uniform prices. Thus,
there arises no necessity of selling costs. On the other side under
monopolistic competition, all the firms produce differentiated products,
thus, each firm has to bear the huge expenses on selling costs.

2. Assume firms in the short run are earning above-normal profits. Explain
what will happen to these profits in the long run for the following
markets:
 - In the case of a pure monopoly, there is no difference in profits in the
long run and the short run because no other firms can enter the market
because of artificial or natural barriers to entry. Therefore, a firm under
pure monopoly will continue to make super normal profit in the long
run as well.
- In the case of oligopoly, profits do not change in the long run relative
to the short run. This is because there are large barriers to entry in the
form of licenses or large fixed costs which deter entry into the market.
Also, firms in an oligopoly do not engage in price competition. So,
market price does not decrease in the long run.
- Firms under perfect competition and monopolistic competition earn
no profit in the long run because of entry into the market of new firms.
If a firm under these two market structure makes super normal profit in
the short run, this firm will make zero profit in the long run as new
firms will enter the market to share some of this above-normal profit.
This entry of new firms will continue until all firms in the market
make zero profit.

3. For each program listed below, discuss what markets failures might be (or
are) used as a partial rationale:
- Automobile safety belt requirements
Information failure.
- Regulations on automobile pollution
Negative externalities
- Unemployment compensation
Unemployment and macro disturbances resulting in market
structure failures
- Rent control
Failure of competition
 - Medicare (medical care for the aged)
Public good
Incomplete information
- Government prohibition of the use of narcotics
Negative externality
Imperfect information

4. If the primary objective of government programs in each of these areas is

the alleviation of some market failure, how might they be better designed?
a) Farm price support
Stabilizing farms incomes may be a better option.
b) Oil import quotas
A tariff achieves the same results but provides revenue to the
government as well.
c) Special tax provisions for energy industries
Change the incentive scheme so that tax provisions are provided
for green initiatives perhaps.
5. Make a list of positive and negative externalities that you generate or that
affect you. For each discuss advantages and disadvantages of the
remedies.

Positive externalities Negative externalities

Positive externalities cause the Negative externalities cause the

social benefits of an economic social costs of an economic activity
transaction (enjoyed both by private (those borne by the whole society)
users who do pay a price for it and to exceed the private costs borne by
free-riders who do not pay the market participants.
anything) to exceed the private There are two forms of negative
benefits that accrue to the market
participants.
There are two types of positive
externalities: (a) positive production Negative production externalities
externalities i.e. the positive
unpriced benefits that arise from
production process and (b) positive
consumption externalities, i.e. the
positive external benefits that arise
from the consumption activities.
externalities: (a) negative
production externalities and (b)
negative consumption externalities.
arise from production activities and
negative consumption externalities
are negative unpriced consequences
of consumption process.
Ex:
1- Air pollution
2- Water pollution
3- Farm animal production
4- Passive smoking

Advantages and dis of each Advantages and dis of each

1. Appreciation in property values 1. Air pollution
that result from construction of new Air pollution may be caused by
roads, mass transit systems, etc. and factories, which release harmful
travel time savings due to higher gases to the atmosphere. Some of
accessibility. the gases include carbon monoxide
2. Development of new and carbon dioxide. The destructive
technologies by companies become gases cause damage to crops,
freely available to other people after buildings, and human health. High
mandatory expiry of the patent. concentration of greenhouse gases
3. Vaccination has an associated in the atmosphere affect the global
positive benefit for others because it climate and brings about extreme
reduces the risk of contraction. heat waves, rising sea levels,
4. Finding your location more intense hurricanes, graded air
accurately as your phone uses quality, and droughts. The release
location of nearby Wi-Fi hot spots. of toxic gases into the atmosphere
adversely affects vulnerable
populations such as children, the
elderly, and patients suffering from
asthma and heart diseases.
2. Water pollution
When industrial wastes are released
to water sources, it makes the water
harmful to humans, animals, and
plants that depend on it. Factory
wastes often contain a mixture of
various chemicals that cause death
to aquatic animals living in the
water, and it denies fishermen a
source of income.
The contaminated water also affects
plants that rely on clean water to
survive. On the side of humans,
drinking water that is contaminated
with industrial wastes poses a threat
to human life and can cause life-
threatening diseases and even
death.
3. Farm animal production
Raising farm animals may also
result in a harmful effect on third
parties who are outside the farm.
For example, the overuse of
antibiotics creates a large pool of
antibiotic-resistant bacteria that
spreads to other areas outside the
farm and causes diseases to other
animals. Also, the concentrated
animal wastes cause contamination
of rivers and streams and render the
water unsafe for human use and
consumption.
4. Passive smoking
Passive smoking refers to the
inhalation of smoke by another
person other than the active smoker.
It occurs when tobacco and
cigarette fumes permeate the
environment and cause its
inhalation by people within that
environment. Inhaling other
people’s smoke, also known as
second-hand smoke, can cause
diseases to the overall population.
Some of the smoking-related health
complications include stroke, lung
cancer, heart disease, and chronic
obstructive pulmonary disease.
High-risk populations such as
children and the elderly are at a
higher risk of respiratory infections
such as asthma and bacterial
meningitis.