1. A reporter contacts you to comment on a report that manufactureres of widgets

Question

1. A reporter contacts you to comment on a report that manufactureres of widgets are colluding. You study the widget market and estimate that the elasticity of demand at the market price is about -0.5. What do you tell the reporter about the collusion?

2. If the demand elasticity for kiwi fruit is -0.2, would kiwi farmers be better off if tropical storms destroyers 1% of each farmers crops? what does that tell you about the farmers incentive to form a cartel? What might stop them?

3. Explain why market power is generally regarded as necessary for price discrimination

Explanation / Answer

1. In this case, we can tell the reporter that due to the inelastic demand there is a high probability there is colluding going on. However, in a market such as this, a firms main goal is to maximize profit therefore, they will eventually cheat and the market will eventually return to equilibrium. 2. In this case, it would be beneficial for a storm to take out 1% of the crop. The good is slightly inelastic and with less supply from the storm, will now be very inelastic. this means we can jack the price up and still earn high economic profits. In addition, if the farmers formed a cartel, they could together reduce the supply and as a group earn economic profits. However, in a market such as this, a firms main goal is to maximize profit therefore, they will eventually cheat and the market will eventually return to equilibrium. Additionally, the government normally does not allow firms to collude and join together. 3. Market power is necessary for price discrimination because if there were other sellers in the market, the consumer can simply switch buyers. In addition, the consumer from the lower price can purchase the good and sell to the higher price consumers undercutting the original seller. Hope this helps

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