4.3 The Market System as an Efficient Mechanism for Information
As the patent on a weight-loss drug ends, scientists also find that the same drug, if taken daily, decreases chances of cancer. How will the equilibrium of the drug be affected?
A patent is a legal monopoly on the sale of a good or service. As the patent expires, the market will go from a monopoly to perfectly competitive. That is, other firms can legally produce the drug. This increase in the number of firms which can produce the drug will increase the supply of the drug causing the equilibrium price to decrease but the equilibrium quantity to increase.
Price has no relation to the relative scarcity of a good, such as whether a shortage of a good exists. TRUE/FALSE
FALSE
Which of the following statements about price controls is true?
Price controls can prevent markets from reaching equilibrium and destroy the links between different markets.
Which of the following provides a valid explanation for why price controls are often counterproductive?
Price controls immobilize the price messenger and deprive everyone in the economy of critical information. Price controls do nothing to affect the underlying forces of demand and supply.
Firms make decisions regarding how to operate based on an industry's market structure. TRUE/FALSE
TRUE
When does a firm shutdown?
The intersection of the average variable cost curve and the marginal cost curve, which shows the price below which the firm would lack enough revenue to cover its variable costs, is called the shutdown point AVC/MC and below
When an effective price control is removed, we would suspect the price of the good to __________________.
return to its equilibrium price
Which of the following does not apply to an industry's market structure?
who the CEO of the largest company is (Firms make decisions based on the industry's market structure, which is defined by how many sellers are in the market, how easy or difficult it is for a new firm to enter the market, and the types of products sold in the market.)
