(Solved): 1. In 2006, three employees at Coca-Cola sent a letter to Pepsi headquarters. The letter explained ...

1. In 2006, three employees at Coca-Cola sent a letter to Pepsi headquarters. The letter explained that the three employees had access to Coke's closely-guarded recipe. The letter writers offered to sell the recipe to Pepsi, assuming that Pepsi would want to leak the recipe and do severe harm to its main competitor. Instead of taking the employees up on the offer and paying for the recipe, however, Pepsi sent the letter to Coke; Coke then contacted the FBI and had the employees arrested. a. While one might initially think that Pepsi did this out of goodwill or some type of sense of moral or legal obligation, the model of perfect competition points to reasons why it was in Pepsi's economic interest to not leak the recipe. Explain why, and note which of the model's assumptions are most relevant to your thinking. b. Given the lessons from perfect competition, what would have been a better strategy for the three employees if they wanted to make money from their knowledge of the recipe? 2. Consider the following two properties of the real estate market: Note: Use the logic of the model to guide your response to this question. Don't bring in outside knowledge at the expense of relying on the model. 1. Commissions that real estate agents earn when they sell houses hover around $6\%$ in all markets. Agents in areas where housing prices are higher (like Boston), earn the same percentage of the final sales price as agents in areas where housing prices are lower (like Fargo, ND). 2. Yearly incomes for real estate agents are not higher in areas like Boston (where housing prices andiphy ommpundeareas like 2. Consider the following two properties of the real estate market: Note: Use the logic of the model to guide your response to this question. Don't bring in outside knowledge at the expense of relying on the model. 1. Commissions that real estate agents eam when they sell houses hover around $6\%$ in all markets. Agents in areas where housing prices are higher (like Boston), earn the same percentage of the final sales price as agents in areas where housing prices are lower (like Fargo, ND). 2. Yearly incomes for real estate agents are not higher in areas like Boston (where housing prices are high) compared to areas like Fargo (where housing prices are low). a. Use insight from the model of perfect competition to explain how and why real estate agents' incomes are equivalent despite the fact that the amount earned per house sold varies across regions. b. How does your answer from (a) point to potential strategies that the collective group of real estate agents can employ in order to increase incomes in their profession? 3. In recent generations, the demand for undergraduate diplomas has consistently increased. a. If the market were perfectly competitive, how would market conditions have responded to the increased demand? Explain in words and illustrate with graphs. For simplicity, assume that the costs of educating students haven't changed over time. b. What factors make the market for undergraduate educations not perfectly increase incomes in their profession? 3. In recent generations, the demand for undergraduate diplomas has consistently increased. a. If the market were perfectly competitive, how would market conditions have responded to the increased demand? Explain in words and illustrate with graphs. For simplicity, assume that the costs of educating students haven't changed over time. b. What factors make the market for undergraduate educations not perfectly competitive? Focus on the ways in which the model's assumptions are violated in reality. How do the violated assumptions help prevent the outcome described in (a)? c. Now, assuming that demand has remained constant, suppose that technological advances have decreased schools' costs of educating students. In words and with a graph, show the effect that this cost decrease would have in a perfectly competitive market. d. In words, briefly explain how factors that you list in (b) prevent this outcome from occurring. 4. True or false, and explain: Because new entrants in a decreasing-cost, perfectly competitive industry cause input prices to decrease for all firms in the industry, existing firms in such an industry should welcome market entrants. Support your answer both in writing and using a graph.