Reference no: EM13223667

(1)In the subsequent week, the price of eggs is unchanged on the sheet that comes in the mail, but the price of feed has gone up a lot. What should I do?

(2)What would you predict will happen to the price of eggs as shown on the sheet in coming weeks and why?

(3)Suppose the government, which published the sheet, changed its policy and instead of merely reporting market prices, dictated that all egg prices immediately double in an effort to help egg producers like me. If it had the means to enforce this new policy, which is known as a policy of price floors, what would be the effect?

A Personal Story
When I was a young teen, I sold eggs from a flock of chickens for which I was responsible. Mostly I sold around the neighborhood. My customers of course had the option of buying eggs in one of several stores in the vicinity. As they would sometimes remind me, they were keenly aware of how my price compared to that in the supermarket. They did not seem to attach much importance to the fact that my eggs were both fresher than the supermarket variety and delivered by what I hope appeared to be a deserving young man learning the ways of business. (Little did they know.)

My late father was a high school teacher and I recently found among his things a 40-year old sheet with which I was once very familiar. He had used this sheet as an example of the kind of services provided by the Federal government. I have attached the one from his files.

He had subscribed to this free service for my benefit. This sheet arrived every day at our house in the mail. I eagerly looked at one line in the sheet--the price for large Grade A eggs in cartons--which is what I was selling. The prices quoted are wholesale--prices to retailers--and I was selling retail, so I could charge a little more than the listed price, but the sheet gave me a good idea of day-to-day movements in egg prices.

My family, of course, ate eggs, too. Although I paid for chicken feed, I was vaguely aware that my Mom and Dad were paying some of the other costs of my business, so they got some of my eggs each week. It seems as if when prices were low they got more eggs.

When, years later, I studied economics and heard about perfect competition I recalled my egg business. It seemed like a rare example of this type of competition.

Pictured below is the the chicken coop circa 2010, showing the long-run impact of perfect competition on those entrepreneurs whose costs are above the industry mean or who try to charge more than the prevailing competitive price.