Answer:
D) The results were not consistent with competitive price theory as he expected.
Explanation:
Demand and supply is a model for price discrimination. Price discrimination also known as pricing is a basic term used to describe setting of prices for a product or service. Before prices are st, manufacturers take into consideration, the cost of materials purchased for that production, the labour and overhead incurred in production.
In competitive pricing, also known as competitive price theory, prices are set at same level in as a firm's competitors. In many markets, same products are usually sold by different firms and as such with the same prices and as such the prices should be in equilibrium
Answer:
D) the results were not consistent with competitive price theory, as he expected.
Explanation:
Vernon Smith created a discipline called experimental economics. His work focuses on testing the core concepts of economics, specially the law of supply and demand, and how equilibrium is affected by it. His experiments show us that market forces are important, but expectations are even more.
His latest studies are about market bubbles and how they are formed. He concluded that bubbles burst (economic collapses) when the people finally realize that their expectations were unrealistic, and that prices kept rising simply because consumers thought they would rise, until suddenly that ends. When finally that happens, everyone realizes the "lie" behind prices and that is when they collapse.
The theory of competitive prices (classical economics) states that must be in equilibrium because many suppliers exist and people decide to pay them. As most premises of classical economics, this theory works great in theory, but in the real world it doesn't apply and it never has. The problem with all classical economic theories is that they are based on the concept that consumers know all the information regarding our economic decisions. But in real life, do you even know the prices of every product in your local supermarket. Or how could you know the price of all the products in all he supermarkets and grocery stores in your town?
Classical economists refused to realize that a housing bubble existed back in 2007 (President Bush and neoconservatives praised classical economics and the last two recessions were during his presidency), because in theory before you purchase a house you must consider the price of every house in the market and that is simply impossible. Prices are set at will, and rarely they are at the equilibrium point where they should be.
