Perfect Competition Long Question 1 (EC1002 - Introduction to Economics)

Mix Martial Artists (MMA) treat Muay Thai (MT) lessons and Brazilian Jujitsu (BJJ) lessons as complementary goods ("To beat the s*** out of your opponent, you must fight while standing and on the ground"). Street Fighters (SF) treat them as gross substitutes ("To beat the s*** out of your opponent, you must take him down fast with only one technique!"). MT lessons are sold in a perfectly competitive market. The demand of the MMAs is elastic and that of the SFs is inelastic. Assume that the SFs constitute a much smaller group of students than the MMAs.

a) Show the initial equilibrium in the market.

b) What are the short run effects of an increase in the price of BJJ lessons on: equilibrium price and quantity of MT lessons, on the spending on MT lessons of each group of students and on the output and profit per MT School?

c) What will happen to all these elements in the long run?