I Love Lucy — 5 Cent Hamburgers

 

Price wars aren’t good for business profits, which is why many firms may want to collude. If two goods are close substitutes, prices should be driven down near the marginal cost of production. This is a good introduction to the long run outcome of perfect competition, but can also be used to show the shut down rule. When prices drop too low, it may be worth some firms to stop production.

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