PS5_Solutions - Econ306 Intermediate Microeconomics...

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Econ306 – Intermediate Microeconomics Solutions to Problem Set 5 Question 1 ( 2.5 points ) The four assumptions underlying the competitive market model are: 1. sellers are price-takers: true, since there are many suppliers and their products are close substitutes, they do not believe they can influence either the price or the actions of other producers; 2. sellers do not act strategically: true, because sellers are not trying to create cartels or agreements; 3. free entry: true, as the government allows snail growing and anybody can start growing snails (there are people willing to initiate new producers); 4. buyers are price-takers: true as well, since there are many buyers, none of which accounts for a large part of the market, and thus none of them thinks they can influence the price or the decisions of other buyers. Therefore, the perfectly competitive model is appropriate for this market. Question 2 ( 1 point ) In a market where there is free entry, new firms will be created as long as there are profits to be made. Mr. Oogav should have foreseen that the number of T-shirt shops would increase substantially once the news of his profit would be spread. As a result of the increased competition, the price falls and profits are reduced, again an outcome that Mr.
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