Micro Essays

Question 1

Nationalisation

Answer 1

-Allocative Efficiency

-Economies of scale (natural monopoly)

However

-Monopsony power

-No profits therefore costs to taxpayer ? - opp cost

Question 2

Mergers

Answer 2

-Economies of scale (Purchasing / Financial)

-Profitability ( > market share = > demand) + diagram

However:

-Diseconomies of Scale

• Exploitation ( They gain (from the same monopoly diagram ) at the expense of the consumer, now demand is inelastic because less substitutes so they rise price therefore less allo) + cs)

Question 3

Conglomerate

Answer 3

-Diversification

-Economies of scale (Managerial / Financial)

However:

-Increased exposure (invest in decline industry)

-High levels of inefficiency (D.E.O.S)

Question 4

Cartel Sucessfulness

Answer 4

-Must be oligopoly
-PED Inelastic

However:

-Prisoners Dilemma
-Elastic in the LR

Question 5

Higher Mobility of Labour

Answer 5

-Education and Training
-Housing Subsidies

However:

-Time lag
-Relocation and Housing Sub r expensive

Question 6

X:Government failure

Answer 6

-Hidden Economy
-Indirect taxes are always regressive
-Unintended Consequences

Question 7

Monopsony

Answer 7

-Negative impacts on suppliers
-Cost to consumers ( suppliers goes implies less choice)

However:

-Some firms gain (when others shut down)
- Benefits to consumers (Monopsony power + E.o.S implies less price)

Question 8

Larger Firm VS. Smaller Smaller (Efficiency)

Answer 8

Larger: Natural Monopoly better than perf comp bcz e.o.s, more CS, Productive eff ( + diagram )

-Perfect competition is better (state the adv)

However:

Larger Monopoly better bcz dynamic efficiency

Perfect comp has no dynamic

Question 9

Oligopoly 3,4

Answer 9

Monopoly diagram + SNP

Non Price Comp

Kink Demand

However:

Prisoners dilemma

Some firms losr brand image bcz of collusion therefore less demand (monopoly diagram)

Conditions for collusion

Theory of the second best

Question 10

Increase in Contestability will do.. However

Answer 10

Lower demand (show on monopoly diagram)

Limit or predatory pricing

However:

Closeness of substitiees

Predatory is illegal

Question 11

Should gov intervene in collusion ?

Answer 11

Yes bcz loss of CS, PROD EFF, ALLO, X-EFF, firms gaining at expense, no superhigh SNP or E.O.S

Cooperation

No bcz:

Theory of second best

Collusion break down anyway (prisoners)

• Cooperation

Question 12

Private vs Public sector

Answer 12

Public: Natural monopoly + diagram

However: No profit incentive therefore X - inefficient

Private: Profit motivated ( + diagram -> Reducing X- Inefficiency)

• Improve Gov Finances

However:

Loss Of Allocatice Efficiency

Question 13

Increase school leaving age:

Answer 13

Increased skills therefore more demand for labour (because can produce > output) therefore less benefit trap

Less firm costs

However:

If every worker is productive then less workers needed + diagram left shift DL

Time

Question 14

Controlling Oligopoly

Answer 14

Forcing prices high => < allo, fines, brand shaming + diagram ( left shift DEmand on monoploky) therefore distinctive to collude

RPI - X

However:

Regulatory capture

Info gap

Tacit Collusion

Question 15

X:Profit max most important obj

Answer 15

Yes cz short term shareholders or mangers want > market share more profits also need for survival (draw LR shut down point)

However

Private sector firm => allocative efficiency

Principal agent prob

Sales max

Question 16

X: Max wage

Question 17

Some firms grow others don’t

Answer 17

• Bcz > market share therfore > prices therefore less substiturs (Diagram with more demand monopoly)

-Internal E.O.S (diagram)

However:

Don’t have finance

Owmers objectives

Question 18

X:NMW

Question 19

Empowering trade Unions to reduce wage differentials and improve labour inequality is the best? (25)

Answer 19

Better in monoponsostic markets bcz no unemployment plus successfully lowers wage differentials

> costs for firms following wage increase therefore (higher cost diagram) therefore less CEO money => less inequality

However:

Unemployment (depends on the market e.g. I’d it was competitive)
Implies benefits trap

Other ones are better ? E.g. NMW or perfectise information

Question 20

Whether a market is contestability no then yes

Answer 20

• Incumbents have E.O.S M/F/P (Diagram)

-Brand Loyalty

However:

D.E.O.S and X-inefficiency => higher costs so new firms compete on price = contestable

Deregulation

Question 21

2 Price Vs 2 Non price to increase rev / profits

Answer 21

-Predatory price: Price low (P<AVC) less competitors therefore more demand (show on monopoly diagram)

-Collusion

-Raising Quality

-Advertise

However:

Predatory is illegal

Game theory

Non price is expensif