Competition & elasticity

Pretty good question about competition & elasticity: The market for paper supplies and the market for toothpicks have the following characteristics: The Market for Paper Supplies is comprised of: * A large number of independent sellers * Differentiated products * Low barriers to entry/exit The Market for Toothpicks is comprised of: * A large number of independent sellers * Homogeneous products * No barriers to entry/exit The Papyrus Company operates in the market for paper supplies and Wudden Floss operates in the toothpick market. The sales managers for both companies want to know how a change in price will affect the quantity sold. If both firms increase prices, the quantity sold by Papyrus Company will: A) increase, and the quantity sold by Wudden Floss will decrease. B) decrease, and so will the quantity sold by Wudden Floss. C) decrease, and Wudden Floss will sell nothing. D) decrease, and the quantity sold by Wudden Floss will remain the same.

B

I said B but dont feel good about it.

I think the multitude of sellers out there hurts both companies – is that the bottom line?

I think it might be C

jk86 Wrote: ------------------------------------------------------- > I think it might be C EXPLAIN

jk86 has it right - I also guessed B, but I was too quick on the trigger. Papyrus operates in monopolistic competition and faces a downward-sloping demand curve, as a result of which, an increase in the price of its paper products will result in it selling less units. Wudden Floss is a price taker operating in perfect competition, and as such, faces a perfectly elastic (horizontal) demand curve. This means that with any price increase, it is going to lose all its business since there are many perfect substitutes out there. C) decrease, and Wudden Floss will sell nothing.

C. Monopolistic competition (paper), demand curve is downsloping, so price increase causes demand decrease. In perfection competition (toothpick), firm is price taker (demand curve is inelastic), increasing price makes it sell nothing.

My economics review the other day was good for something!

hopetobeat Wrote: ------------------------------------------------------- > C. > Monopolistic competition (paper), demand curve is > downsloping, so price increase causes demand > decrease. > > In perfection competition (toothpick), firm is > price taker (demand curve is inelastic), > increasing price makes it sell nothing. SH$$, THX MAN. THIS WAS A GOOD ONE.

“homogenous products” is the giveaway - you don’t even have to worry about elasticity of demand and the supply curves etc. If the products are homogenous in perfect competition a price rise means you won’t sell a thing.

C for sure horizontal demand curve for perfectly competitive markert

what if the price increase was generated by a sudden increase in resource prices? say, wood?

All firms would be affected, prices would increase, sales would drop, firms would exit?

map1 Wrote: ------------------------------------------------------- > what if the price increase was generated by a > sudden increase in resource prices? say, wood? In this case the entire market will be affected not only the two fims

map1 Wrote: ------------------------------------------------------- > what if the price increase was generated by a > sudden increase in resource prices? say, wood? p=mc mc goes up, p goes up too

C

newsuper Wrote: ------------------------------------------------------- > “homogenous products” is the giveaway - you don’t > even have to worry about elasticity of demand and > the supply curves etc. If the products are > homogenous in perfect competition a price rise > means you won’t sell a thing. thanks, this will help me remember it. homo = flat line = price takers.

hopetobeat Wrote: ------------------------------------------------------- > C. > Monopolistic competition (paper), demand curve is > downsloping, so price increase causes demand > decrease. > > In perfection competition (toothpick), firm is > price taker (demand curve is inelastic), > increasing price makes it sell nothing. I think you meant that the demand curve is perfectly elastic (horizontal), not inelastic…this was a good question. daj224-the homo=takers is funny if you have the bad humor that I do…but hey whatever helps remember stuff!

C- first one is mono comp and the second one is perfectly comp.