(Solved): Q2 PRICE-TAKERS VS. PRICE-SETTERS For the following question, we will consider two different marke ...

Q2 PRICE-TAKERS VS. PRICE-SETTERS For the following question, we will consider two different markets: the market for Electric cars, and the market for milk. Below are two figures that illustrate the price and quantity decisions of a single firm that maximises its profit in each market. a. What do the demand curves represent in each diagram? Which diagram shows more elastic demand? b. In which market are products more differentiated? c. What criteria do consumers use to make a buying decision in each market? For which good would price be a more important criterion for consumers to make a buying decision? d. Using your answers from 1, 2 and 3, decide whether individual producers that produce these goods are price-takers or price-setters. Which market situation is better explained by which figure? Explain why. e. Now draw a model for the market for milk instead of a single firm. Show the equilibrium price of \$2 per litre and equilibrium quantity of 5,000 litter. Shade the areas of consumer and producer surplus. f. Is the equilibrium a Pareto efficient? g. Suppose that firms producing milk decide to get together and form the Milk Cartel, where they will collude on setting prices at \( \$ 2.70 \). Explain what happens to equilibrium quantity, and consumer and producer surplus. h. Does the decision to collude bring about a Pareto improvement?