Suppose there are two market structures: A and B. Market A is characterized by free entry and exit of firms and firms under this structure face a horizontal demand curve. Market B has only one seller. Identify the market structures
Comment on the pricing mechanism, long-run profitability, and social surplus under both market structures.
Firms in Market A face a horizontal demand curve. This implies that the market demand is perfectly elastic and all firms will be price takers. Hence, Market A is a perfectly competitive market.
Market B has only one seller. A market where there is a single seller is a monopoly. Hence, Market B is a monopoly.
Pricing: Firms in Market A will price their products at the marginal cost corresponding to the output sold. The seller in Market B will price its product higher than the marginal cost corresponding to the output sold.
Long-run profitability: Firms in Market A will earn zero profits in the long run, whereas the seller in Market B can earn positive economic profits in the long run.
Social surplus: Social surplus is maximized in Market A, whereas social surplus is not maximized in Market B.
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What will be an ideal response?