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Exercise Set C
Q.1: Economists claim that firms operating under perfectly competitive conditions are highly efficient, especially in the long run. Explain what is meant by “efficiency”, what types of efficiency are involved and how is efficiency (or efficiencies) achieved.
Q.2: Hospitals in Montgomery are profit-maximizing, perfectly competitive firms. Hospitals in Birmingham, on the other hand, are run by nonprofit charities that try to minimize the long-run average cost of treating patients. Hospitals in both cities have the same average and marginal cost. Will the Montgomery hospitals end up been bigger, equal or smaller in size? Explain your answer.
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Q.3: Textbook publishers hope to maximize profits. Authors, on the other hand, have different incentives since they are paid royalties. Assume that an author’s contract specifies royalties of 20% of the revenue from the sale of the text. Thus, if the publisher’s revenue is $100,000, the author’s royalties will be $20,000. Who will prefer a higher price for the text, the publisher or the author? Explain in detail. (Hint: Assume a linear demand for the text and use the elasticity concept)