1. Characteristics of competitive markets The model of competitive markets relie
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Question
1. Characteristics of competitive markets The model of competitive markets relies on these three core assumptions 1. There must be many buyers and sellers-a few players can't dominate the market. 2. Firms must produce an identical product-buyers must regard all sellers' products as equivalent. 3. Firms and resources must be fully mobile, allowing free entry into and exit from the industry. The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry. Identify whether or not each of the following scenarios describes a competiive market, along with the correct explanation of why or why not. Scenario In a small town, there are two providers of broadband Internet access: a cable company and the phone company. The Internet access offered by both providers is of the same speed In a major metropolitan area, one chain of coffee shops has gained a large market share because customers feel its coffee tastes better than that of its competitors. The government has granted a patent to a pharmaceutical company for an experimental AIDS drug. That company is the only firm permitted to sell the drug. Dozens of companies produce plain white socks. Consumers regard plain white socks as- identical and don't care who manufactures their socks. Competitive? Yes, meets all assumptions No, no free entry No, not many sellers No, not an identical productExplanation / Answer
1. The assumption of being many sellers is not fulfilled here. There are only two service providers in the town
2. The Assumption of free entry and identical product are not met here. There can't be a possibility of free entry as the new firm will incur huge costs for extracting market share from this particular chain. The product is not identical in the sense that the kind of coffee this coffee shop provides to its customers, tastes different than that of other coffee houses.
3. All three assumptions are not met here. Giving patent to one company implies that the product is different, and because only this firm is allowed to sell the drugs, there are not many sellers. And, there's no free entry in the market because of given patent.
4. All three assumptions are met here.
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