Questions Question 1. In microeconomics basic theory, many economi...

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Question 1. In microeconomics basic theory, many economists believe that “perfect competition” is preferable to “monopoly” or “oligopoly”. At the same time, SCP theory, which is founded on microeconomics basic theory, suggests that firms should be in industries close to monopoly or oligopoly rather than in industries close to perfect competition.
(1) Explain why microeconomics basic theory and SCP theory have such divergent views.
(2) In perfect competition, firms cannot control market price and thus market price tends to be lower than that of monopoly and oligopoly. In some occasions, however, firms in oligopoly may decrease market price substantially. Explain why this could be the case using game theory. Further, identify a real-world example of “perfect competition” and a real-world example of “price-cut-competition in oligopoly”, and compare their mechanism.

Question 2. In game theory, a firm under “(non-corporative) simultaneous game” may make a strategic commitment so as to change the situation from simultaneous game to “sequential game” in which it plays a role of leader. For attaining this objective, the firm’s strategic commitment must be “credible”.
(1) Identify a real-world business example of sequential game in which a firm plays a role of leader by making strategic commitment.   
(2) Discuss why the identified strategic commitment in your example is credible.

Question 3. Agency theory suggests that interest divergence and information asymmetry between players may incur “moral hazard” problem.
(1) Identify a real-world business example to which “moral hazard” problem is applicable. Discuss why it could be the case. (You cannot use an example discussed in the class.)   
(2) Based on your identified example in (1), discuss how changing “incentive structure” can mitigate the moral hazard problem.

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Question 1:
1) Though the microeconomics basic theory believes in the fact that perfect competition is the most efficient form of market structure where both production efficiency and allocative efficiency is achieved, the SCP theory focuses on the firms’ casual relationships between the structure of the market in which the firms operate, the conduct of the firms in the market and also their performance.
Basically, the assumption of the microeconomics basic theory about the perfect information with the buyers and sellers is not a realistic phenomenon, and hence perfect competitive market structure is also not a feasible market structure for the firms to operate. Even in agricultural markets, which have been given as an example for perfect competition now has organic products which are differentiated from the normal agricultural goods.
Both the formal microeconomics basic theory and SCP theory focuses on analyzing market structures, but their analysis of market structures developed along diverse paths but these paths were most principally parallel. There are vast differences between perfect competitive market structure as laid out by basic theory and monopoly and oligopolistic market structure as given out by SCP theory.
The first difference starts...

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