Answers_to_Asst_3 - Answer Key for Assignment 3 - ECON...

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Answer Key for Assignment 3 - ECON 423-823 - Fall, 2008 1. Traditional microeconomic analysis seems to point to price competition as a beneficial characteristic of market economies. Under perfect competition, prices exactly reflect the underlying costs of production, leaving no “excess profits.” Therefore, price signilas transmit accurate information about underlying opportunity costs. However, Schumpeter effectively disputed the value of perfect competition for economic growth. Since innovation is costly, excess profit is necessary to cover the cost of innovation. Schumpeter pointed out, however, that technological competition would still eliminate excess profit, however. Except that excess profit now was profit over and above the costs of innovation. Schumpeter’s idea of competition was radically different from the price competition that traditional microeconomics positioned as the driving force of economic efficiency. Schumpeter argued that there was ferocious competition among firms, but it was technological competition, not price competition. This competition to develop new products and production processes in fact increased profits, but it was precisely these monopoly profits that induced innovators to incur the up-front costs of innovation. However, Schumpeter wrote that we did not have to
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Answers_to_Asst_3 - Answer Key for Assignment 3 - ECON...

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