1. A firm in a perfectly competitive market invents a new method of production t
ID: 1232355 • Letter: 1
Question
1. A firm in a perfectly competitive market invents a new method of production that lowers its marginal costs. What happens to its output? What happens to the price it charges?a. The firm has an employee who threatens to tell all other firms in the industry about how to implement this new technique. Will it be possible to bribe the employee not to do this? Explain why or why not?
b. Why should this employee probably choose to tell only some of the other firms rather than all of them?
c. What factors will determine the best number of firms to sell the secret to? (Assume that those who get the information keep the secret instead of selling it to still others.)
Explanation / Answer
Perfectly competitive market is a form of market in which very large number of firms operate with easy entry and exit. The new invention of the method of production that lowers it marginal costs will help the firm to decrease their prices which will result in increase in output demanded and market share as output demanded and price are inverse to each other. a. Bribing an employee cannot be a option to be considered as it looks like that the employee is greedy and will soon enough ask for more money , worst other employees will also start to use same tactics if this employee is paid. The best way is to purchase patents , copyrights or license the method from government which will prevent other firms from using the method. b. The reason behind employee to choosing to tell only some of the other firms rather than all of the them is if he told them all there will be no incentives for the firms from the method as all the firms in the market will be using the method and there will be no competitive advantage over other firms. That will also not help the firms in increase in market share or profits potentially, and the firm will not pay for something which does not earn them economic profits or increase their market share. That is why employee is threatens to tell few firms about the method as they can increase their market share and economic profits and in return he will be paid large sums for the method. c. To determine the best number of firms to sell the product the factors that need to be considered are is the firm directly rival to the firm that is selling the product or a they a differentiated product, in which segments, geographically and demographically, does the firm operates to whom the method is sold, future risks associated with the sell of the method such as lose of market share and a decrease of profit level.
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