Imagine two small and nearly identical economies. They are identical in every way except the degree...

 

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Imagine two small and nearly identical economies. They are identical in every way except the degree of market power. One is full of monopolies, while the other's industries are perfectly competitive. The world economy of which these two small economies are part - suffers a series of shocks that affect the supply of many inputs like oil, wheat, steel and timber. Which of the two economies - the one with monopolized industries or the competitive one will exhibit the largest price changes as a result of these shocks? Explain your reasoning. Imagine two small and nearly identical economies. They are identical in every way except the degree of market power. One is full of monopolies, while the other's industries are perfectly competitive. The world economy of which these two small economies are part - suffers a series of shocks that affect the supply of many inputs like oil, wheat, steel and timber. Which of the two economies - the one with monopolized industries or the competitive one will exhibit the largest price changes as a result of these shocks? Explain your reasoning.

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The economy with monopolized industries is likely to exhibit larger price changes as a result of the supply shocks compared to the economy with perfec... View the full answer