PART I. Short Answers Use simple models to analyze what happens in the following

Question

PART I. Short Answers Use simple models to analyze what happens in the following cases. Answers, in cluding diagrams, should be limited to one page. Please think before you answer. 1. You might wish to refer to Miller, R. et al. 2016. "Keeping the Competition Out." Economics of Public Issues 19th ed. Pearson pp. 130 - 135. The book can be found in the TFDL (a) Assume you run a nail salon and are considering two different ways of beating your competition. One way is to offer your customers lower prices and better services. The other is to get a law passed that imposes extra cost on your competitors. Can you see any difference between these two methods, assuming that both succeed in keeping competition out? (b) Is there any difference between prohibiting (restricting) entry by a group of firms and levying a special tax on those firms?

Explanation / Answer

A There is clear difference. The first method of reducing prices and offering better quality service will increase costs as better quality often takes long time, greater costs and lower prices lead to lower revenue. Since profit is equal to revenue minus costs, profit will fall. On the other hand the second method does not reduce price and still reduces competition. It will infact increase profit.e.g firm can now charge higher price, demand will increase at same price etc. These will increase profit. So clearly 2nd option is preferable

2 Yes there is a clear difference. First method by reducing competition, increasing demand etc increases profit. The 2nd method doesn't reduce competition as much. There will be still rivals in the market. There prices will be high only if tax is per unit. Thus this method is not preferable Only first method is preferable

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