Chapter 7
Essay questions
- “The road-haulage industry of the European Union is clearly one of monopolistic competition.” - Discuss.
- “Firms in both perfect competition and monopolistic competition can only earn abnormal profit in the short-run. Therefore, the distinction between the two market structures is meaningless.” - Discuss.
Exercises
1. A market is characterised by the following demand and supply conditions:
Qd = 55 - 5P
Qs = 10 + 10P
(a) Derive the equations for the inverse demand and supply curves and plot them on a single diagram.
(b) What is the equilibrium price and output in this market?
(c) What are the values for consumer and producer surpluses at this equilibrium?
The government deems the market-clearing price to be too high and so enforces a price ceiling at £2 per unit.
(d) What is the effect of the imposition of this price ceiling upon the quantities demanded and supplied in the market?
(e) What is the value of producer surplus that results from the introduction of the price ceiling?
(f) What is the value of the deadweight welfare loss of this regulation?
Due to a reduction in direct taxation, the demand curve shifts outwards so that it has the following equation:
Qd = 70 - 5P
(g) What is the value of the deadweight welfare loss of the price ceiling given this change in demand?
