Please answer each of the following questions. Make sure your answers are in com
ID: 1091134 • Letter: P
Question
Please answer each of the following questions. Make sure your answers are in complete sentences, and cite all sources used in your answers.
1. What is the perception of monopolies in the United States? Why is there such a perception?
2. What is a regulated monopoly? Why are they allowed to exist?
3. What are the characteristics of oligopolies? What power do oligopolies have in the market?
4. How does insurance encourage businesses to engage in riskier behavior?
5. How can customers determine if a product is a
Explanation / Answer
1). In the US, monopolies are considered to be huge firms which sell their products at high prices. They are price makers and they exploit the consumers by selling at high prices. They are able to do so because of lack of competition. These monopolies should not be allowed to operate without some regulations.
Such a perception exists because of the nature of monopoly itself. The huge size of the business, the lack of competition, the ability to sell at high prices are all factors that lead to this perception. Consumers want to attain products at lowed costs. They also want freedom of choice which is absent or restricted in a monopoly market.
2). A regulated monopoly is one that is allowed to exist but it is regualted and supervised by an authority. It is not given complete freedom to do whatever it wants, rather its activities are regulated.
This is done in order to reduce the harmful activities of monopolies. Their size, the prices at which they sell products to consumers are regulated so that consumer exploitation does not take places. Thus they are made to follow certain ruls and certain restrictions are put on them.
3). CHARACTERISTICS OF OLIGOPOLY
- Oligopoly market consists of few sellers.
- They are interdependent i.e. the decisions of one seller affects the decisions of other sellers in the market.
- There are barriers to entry i.e. new firms find it difficult to enter the market because the few pre-existing firms hold a significant share of the market and are hard to compete against.
- There is group behavior i.e. they can form cartels and decide on what price to set and what quantity to sell
- The products can be homogeneous or differentiated
- There is price rigidity i.e. price changes do not take place quickly and easily
- There is non-price competition e.g. in terms of advertisement, product differentiation, research and development etc.
- All firms are assumed to have perfect knowledge of other firms' prices, quality, quantity sold etc.
Olipolies can exercise great power in the market. They can operate as cartels. They can fix the price and the quantity at which they will sell the products. They can restrict quantity in order to kep prices high and earn great profits.
4). Insurance encourages businesses to enagage in riskier behavior as insurance provdes a cover in case any damanges occur to the business. Before insurance, in case of damages the business would have had to pay out of its own accounts. Thus it would be more risk averse and would try to minimize costs by keeping away from risky activitis. However, now the firm does not have to pay in case of damages. It knows that the insurance company is now lliable for any losses and so it is covered. Now the firm is more likely to engage in riskier activities.
5). Lomon products can be determined by comparing the costs and quality of the product with its available subsitutes. Lemon products like branded products can have high prices and not good quality, this can be seen by comparing the product with substitutes in terms of their quality and prices.
Inferior goods are goods which are considered to be of such low quality that consumers do not buy them at low prices. Their demand increases as their prices increase, and consumers start to consumer them more.