Perfect Competition Multi-Firm Questions

2008 Zone A Question 3

The Market for Calendars is comprised of two 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 subsidising the wages of the charities’ workers. 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.
(d)  Which of the schemes should the government choose?

2008 Zone B Question 3

Commodity x is supplied competitively by two very different regions of a country. The first is a region with good infrastructure. The second region has been neglected in terms of public investment. In spite of these differences, initially, the costs incurred by producers in either region were the same. However, the good infrastructure in the first region attracted a great deal of Foreign Direct Investment while the other region did not receive any.

(a)  Describe the initial equilibrium in the market before the introduction of FDIs.
(b)  How will the flow of FDIs affect the costs in the recipient region?
(c)   Examine the effects, in the short and in the long run, that this will have on each region as well as on the whole market.
(d) The government proposes to subsidise wages in the poor region. What could be the rationale for such a decision and what would be its consequences?

2011 Zone A Question 3

The market for Olive Oil is competitive and is supplied by two different regions that face exactly the same costs. The local governments in both regions are trying to help their local industry. In region A the local government offers a unit subsidy to all producers to ensure that they capture a greater share of the market. The local government of region B responds by offering a grant (lump- sum subsidy) to all producers.

(a)  Show, diagrammatically, the initial set-up of the industry.
(b)  What will be the effect of region A’s policy on equilibrium price and output and on the market share of each region in the short run?
(c)  What will be the effect of region B’s response in the short run and in the long run?
(d)  What might be the outcome in the long run, had the central government required that for equity reasons the overall sum paid to each firm should be the same across regions?
(e)  Evaluate the two regions’ policies.

2011 Zone B Question 3

In the town of Mysantropia people like to be served. Therefore, the reason people go to restaurants in this town is only for the purpose of being served while eating. The restaurants market is perfectly competitive. One of the restaurateurs had an entrepreneurial idea. He decided to close down his restaurant and offer a new service called: home pampering (or HP). This service offers the opportunity of having a fully served meal at home. In such a case, the cooking and the serving takes place in the client’s home. This means that the production of each served meal is now more expensive (more people involved with the production of each meal) but the ability to get rid of the restaurant offered a great saving.

(a)  Using a diagram, show the initial equilibrium in the market for served meals before the idea of HP was conceived.
(b)  How would the introduction of the HP idea affect the market in the short run?
(c)  What would be the effect in the long run?
(d)  If the concern over diversity prompted the local government to offer restaurants a lump sum subsidy, would your answer to (c) change?

2012 Zone A & Zone B Question 3

Strawberia is a country where growing strawberries constitutes the main commercial activity of most of the population. The market for strawberries is competitive and supplied by commercial firms as well as social entrepreneurs. The latter distribute all profits to their workers who are initially hired in the competitive labour market.

(a) Describe and illustrate the initial long run equilibrium.
(b) Suppose now that the price of cream, which is perceived as a complementary good to strawberries, has gone down. Analyse the short run effect that this will have on the market and the two types of suppliers.
(c)  What happens to the market share of social entrepreneurs in the long run?
(d) What are the short run and long run effects of an increase in productivity of those who work in social enterprises (assume that they are not enough in numbers to affect the wage level in the labour market)?