Answer:

Part a:

A seller is faced with an upward sloping supply curve under the perfectly competitive market structure, this upwards sloping supply curve is represented by the rising portion of the marginal cost curve (Kirzner 2015, P.6). This positively sloped supply curve depicts the fact that if there is a rise in the price level the seller will supply more of the goods.

As it has been outlined in the figure above the upward sloping supply curve is depicted by the SJ portion of the MC curve. It can be observed that the firm cannot continue its production if the price level drops below the point S. This is because below this point the firm will not be able to bear its fixed cost and will need to shut down its production (Karier 2016, P.55). Therefore from the diagram it has become quite evident that the seller possesses an upward rising supply curve under the perfectly competitive market structure. Here in this specific case the seller is supplying Q0 amount of quantity at a price P0. The seller is earning supernormal profit which is P0C.

Now the seller if wish to restrict the supply of the products at the given price in the short run, the seller can supply lesser amount of goods at the existing price level (Baumol & Blinder 2015, P.189). Now as the supply of the products has been restricted the cost of production will also be low as the variable cost will be lower and hence the average total cost curve of the firm will shift downwards. This can be represented with the help of the following diagram.

As it has been represented by the diagram above the seller can reduce the supply by Q1Q0 unit through producing less. At this situation also the seller can continue to charge the same price as the price is determined by the market and the firm here is the price taker. On the other hand, due to the reduction in the level of production the cost of production will also reduce. As a result the total profit of the firm will rise. It can observed that initially the profit of the seller was represented by the rectangle P0JKC and now the profit is P0JLC1 which is higher than the previous profit.

Part b:

The perfectly competitive market depicts the following characteristics,

• Perfect knowledge prevails in the market with no time lags in the information flow. Availability of knowledge is free which signifies that the entrepreneur takes minimal risk and his or her role is also limited.
• Given the fact that the buyers and sellers possesses perfect knowledge it is expected that they will exhibit rational behavior. The buyers will be willing to maximize utility while the sellers will be willing to maximize profit (Mahoney & Weyl, 2017).
• There is no barriers to entry or exit from the market.
• Firms are producing identical and homogeneous products.
• The units of inputs like labor are homogeneous.
• The market price cannot be influenced by a single firm and in this context a single firm is considered as a price taker which takes the price level determined by the industry. A single firm will not raise the price level as it would then become unable to sell any of its products (Sagi & Pataki 2015, P.66). On the other hand, a single firm will not lower the price level because at the market price the firms will be able to sell all of its products.
• The economy is a Laissez faire economy that is there no intervention on the part of the government.
• The firms can make supernormal profits in the short run but earn only normal profit in the long run.

Given the features of the perfectly competitive market it can easily be stated that the firms in the given extract are not operating in a perfectly competitive market. This is because the firms in the extract have charged different prices which is not possible in a perfectly competitive market as in such a market structure price is determined by the industry. They have also faced different demand for their products as well.

No the restaurants generally do not operate in a perfectly competitive market. This is because the restaurants do not sell identical products or services. Rather, the restaurants operates in a monopolistic market. Under the monopolistic market there are a few firms selling slightly differentiated products to a large number of buyers.

Answer to Question 3

Under monopoly market structure a seller can maximize revenue through charging a higher price to the consumers or increase the quantity of sales by lowering the price level. A monopoly market is characterized as a market where there is a single firm selling a unique product to a large number buyers (Varian 2014, P.95). As per the monopoly market structure a single firm produces a unique product which in turn enables it to charge higher prices. Moreover, the monopolist faces a downward sloping demand curve which signifies a negative relationship between the price of the product and quantity demanded.

The figure above represents the equilibrium condition of a monopolist. Where Pe denotes the equilibrium price and Qe denotes the equilibrium output at that price level. Now it can easily be observed from the diagram above that if the seller increases the price level from Pe to P1 the quantity demanded will fall to Q1.

However, as the “Value of exclusivity” is assumed it is quite evident that the seller has already decided to restrict the amount of output that it was supplying. As it has been observed that the producer is now selling a reduced amount while maintaining the price at a low level. As the firm is operating under monopoly market structure it does not possess a supply curve as a result the restriction over the supply will influence the demand curve of the firm (Naumenko & Moosavian 2016, P. 74). The implementation of the value of excludability coupled with the lower price in turn helps the seller to raise the demand for its products and services substantially.

As a result of the aforesaid procedures the demand curve as well as the marginal revenue curve of the individual will shift upwards to the right. This is explained with the help of the following figure,

As per the above figure the D1 represents the initial demand curve of the seller and the corresponding marginal revenue curve of the individual is represented by the MR1 curve. The seller will be at equilibrium where the marginal revenue is exactly equal with the marginal cost. The firm in the above diagram initially was in equilibrium at the point E1 where it was facing demand amounting up to OM1 at the price level OP. Now the seller has imposed a supply restriction and the implementation of this strategy coupled with the value of excludability has shifted the demand curve of the seller to D2 and the corresponding marginal revenue curve has also shifted to MR2 and this clearly depicts the seller is facing an increased demand at the given price. Therefore, the value of excludability has helped the restaurant to increase the demand for its products. Now the new demand is OM2 at the previous price level. In this situation the revenue of the firm has been observed to have increased substantially. Moreover, the level of profit has also been observed to be increased as previously the cost of the seller was E1M1 and now it has become E2M2 which is lower. 

Therefore, it can be stated that the seller in the given case has not incurred any loss by charging a lower price in comparison to its competitors. On the other hand, this lower price has in turn helped the seller to accrue larger revenue and thereby increase profit as well (Carbaugh 2016, P. 122).

Answer to Question 4

Part a:

Price discrimination assists the monopolist to charge different prices to different buyers for the same product. This is the situation which can be observed in the case of the given restaurant (Varian 2014, P. 101). After the quantity restriction the firm may practice certain unethical practices such as offering the same product at different prices to different customers.

The figure above depicts the situation of a monopolist seller carrying out price discrimination practices. As pointed out in the figure above the initial demand curve of the discriminatory monopolist is D0 and the corresponding marginal revenue curve is MR0. The seller will be at equilibrium at the point where the marginal revenue curve intersect the marginal cost curve. The initial equilibrium price charged by the seller was P0 and the quantity demanded was Q0. Moreover, it is necessary to mention that in order to produce output amounting up to OQ0 the seller also bears certain costs which is represented with the help of the average cost curve (Arrow 2015, P. 124). However, now as the seller has imposed a selling restriction he can now charge a higher price which is represented by P1 through practicing price discrimination and maintaining the same amount of output. In the context of the cost structure it can be stated that cost has remained in a stable condition. Hence this enables the seller to accrue a higher level of profit. This increase in the level of profit can be explained easily with the help of the above diagram. Initially the profit of the seller was P0C but after increasing the price level the seller can now accrue a profit amounting to P1C which is much larger.

It is noteworthy that the seller is now charging price P0 to some buyers and P1 to some other buyers with ability to pay higher prices. Here the market determined price is P0 which is legal. The product which is being sold by the seller has a huge demand and through restricting the supply the seller is further enhancing the demand for the product (Waldman & Jensen 2016, P. 36). For this some buyers are willing to pay higher price for the product. 

Part b

In accordance with the monopoly power, price discrimination can be divided into two segments, which are namely anti-competitive and pro-competitive. In the context of the anti-competitive price discrimination, the monopolist serves the entire market as there are no other firms in the market and there will also be barriers to entry (Belleflamme & Peitz 2015, P. 77). The key reason behind the anti-competition price discrimination may be the pricing strategy or uniqueness of the product. If the discriminating monopolist sets the price level at the rock bottom and no other firm will be able to keep the price at that level, automatically they will not enter into the market (Frew et al. 2017. P. 49).

Pro-competition in the other hand, is just opposite to the anti-competition price discrimination. In this case there is no barriers to entry and competitive firms can enter into the market. In such a situation the other competing firms also charge the same price as a result of which the market becomes competitive (Gilbert 2018, P. 77).

In the context of the given scenario, it can be observed that the restaurant is practicing anti-competitive price discrimination. This large and reputed restaurant is maintaining a lower price of its products which in turn is restricting the other small firms to compete in the marketplace. As a result of this the firm is reducing the level of competition in the market.

Answer to Question 5

As per the law of demand there is a negative relationship between price and quantity demanded. This signifies that an increase in the price level of a commodity will lead to decrease in the quantity demanded and vice versa ceteris paribus (Romer 2015, P. 69). However, the demand for a commodity can be influenced by several other factors than price. As a result the demand curve not always behave in the usual way. 

It is quite obvious that the demand for these two commodities will be highly elastic. This signifies the fact that a small increase or decrease in the price level will lead to a greater increase or decrease in the quantity demanded. For instance in the figure above the initial price was P0 and the quantity demanded was Q0, however, a fall in the price level will lead to a greater increase in the quantity demanded. When price declined to P1 which lead to a greater increase in the quantity demanded Q1.

However, the demand curve for the stock market or company shares in not like the usual demand schedules. This is because people buy company shares when the prices are low with the expectation that in future the prices will rise and they will accrue benefit by selling those shares (McKenzie & Lee 2016, P. 89). Hence the demand curve of the company shares will be upward rising as presented in the figure below.

Now it is a matter of fact that if people assume that the prices of the housing or gold will change in near future they will also frame their strategies accordingly. For instance if people get informed that the prices of housing or gold will increase in the upcoming month. They will purchase more of the gold at the existing price and will expect to earn revenue by selling those gold when the price will be higher (Baumol & Blinder 2015, P. 67). Similar is the case with stock market shares, when the prices are low people will demand more of the shares. However, if there is any intimation that the stock prices are going to fall people will start selling of their stockholdings to stay in a beneficial condition. 

Reference List

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