Short Answer
2. The incentives created by the attempt to bring about a more equal distribution of income are in conflict with the incentives needed to generate increased income. Explain this statement (include examples in your explanation).
Incentives created to bring about more equal distribution of income may cause a tradeoff in decreased economic efficiency. For example, higher marginal taxes may reduce the efforts of those at the top to work harder and produce more. Similarly, greater benefits to those at the bottom may reduce their incentive to work harder since they receive benefits without the productive effort.
3. What distinguishes an oligopoly market structure from a monopolistic competition market structure?
Oligopoly is distinguished from monopolistic competition by being composed of few firms (not many); by being mutually interdependent with regard to price (instead of control within narrow limits); by having differentiated or homogeneous products (not all differentiated); and by having significant obstacles to entry (not relatively easy entry). Both engage in much non-price competition.
1. a) What assumptions about a rival's response to Price changes underlie the kinked-demand curve in an oligopoly? b) Why is there a gap in the oligopoly marginal revenue curve? c) How does the kinked-demand curve explain price rigidity in oligopoly? d) What are the shortcomings of the kinked-demand model?
The assumptions that (i) rivals will match price cuts, but (ii) rivals will ignore price increases, underlie the kinked-demand curve that represents an oligopoly non-collusive market model. The gap in the MR curve results from the abrupt change in the slope of the demand curve at the going (=current) price. Price rigidity in an oligopoly is explained by the kinked-demand curve because firms will not change their price since they fear that it will decrease their total revenue and profits. Shortcomings of the kinked-demand model: (i) it does not explain how the going (=current) price evolved in the first place; (ii) it does not allow for price leadership and other forms of collusion.
