Chapter 4 Tutorial 3

Okay guys, here’s a perfect competition question with 2 firms in play.

1. The market for postcards is comprised of 2 types of producers. There are commercial firms and there are charities which employ disadvantaged people. The market is competitive and the costs, which charities face, are higher than those of commercial firms which use more capital intensive technologies. The charities cover their losses through donations.

a. Describe the initial set up in the market.

b. The government wishes to support the charities and suggests levying a lump sum tax on the commercial firms. What are the implications of this for the short run and long run equilibrium in the industry? Consider here the effects of the scheme on charities (and their workers), commercial firms and consumers.

c. Alternatively, the government is considering subsidizing the wages of the wages of the charities’ workers. What are the implications of this for the short run and long run equilibrium? Consider here the effects of the scheme on charities (and their workers), commercial firms and consumers.

d. Which of the schemes should the government choose?

 

 

Remember to attempt the question first!

 




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