Describe what the cartel does if someone does not follow their instructions
If someone does not follow the instructions of cartels, the cartels will engage in activities that aim to increase the prices of products and services over the price of the market. This behavior is adverse in the sense that consumers will not manage to buy the products, and for that reason, the sales of the company in question will go down. Cartels will also discourage new entrants into the market, and for this reason, they will act as a barrier to entry to the person who refuses to follow their instruction. These people will also lack innovation because there is no competition.
Describe how a price leader strategy works
A price leader refers to a company, which exercises control over all the other companies and determines the prices of goods and services that are in a market. The actions of the price leaders make the competitors adjust their prices because they should match the costs that the price leaders set. For price leaders, they are the companies that other players look up to in the industry. The price leader comes up with the specific price of a product depending on the market price or the cost that the company incurred to make a unit of the product that it sells. The other companies adjust their prices so that they can fit.
Characteristics of perfect competition
A perfect competition has many buyers and sellers in the market. The number of buyers can be equal to the number of sellers. Therefore, the competition is not that high because the companies that exist in the industry make the same products. The buyers and sellers in the perfect competition have the access that they need concerning the perfect information that relates to prices. In this market, the transaction costs do not apply. The market does not have barriers to entry into or exit. People are free to do whatever they want because there are no restrictions.
Question 5
Nash equilibrium refers to a concept in the game theory in which the optimal outcome of the game is where an incentive cannot exist, which deviates from an initial strategy. Overall, an individual does not get any incremental benefit when they change their actions, even if the other players choose to remain constant in the strategy that they use. In this case, the Nash equilibrium is when both the prisoners confess, and they get three years in prison each, or when they both deny, and they get one year of prison each. Whether the prisoners choose to accept or deny their actions, they will have to suffer the repercussion.
Question 6
In the long run, the competition caused by the entry into the market by new firms causes all the firms in the market to make normal profits, just as in the case of a competitive market. The entrance of the few firms into the market is likely to happen if firms earn positive profits in the short run. There are no barriers to entry into the market, and that is why it is easy for any new firm to enter the market. When there is new entry of the firms, the supply of differentiation products will increase, and this causes the demand market of the firm to shift to the left.