1. a. Briefly state the basic characteristics of i).pure competition, ii). pure
ID: 1221269 • Letter: 1
Question
1.
a. Briefly state the basic characteristics of i).pure competition, ii). pure monopoly, iii). monopolistic competition, and iv).oligopoly. (Make a list for each market structure.)
b. Under which of these market classifications does each of the following most accurately fit? (a) a supermarket in your hometown; (b) the steel industry; (c) a Kansas wheat farm; (d) the commercial bank in which you or your family has an account; (e) the automobile industry. In each case justify your classification.
2. As judged by strict conformity to the institutional characteristics. Pure competition is relatively rare.
a. Then why study it?
b. Give two example of industries that closely fit this category of market structures and briefly indicate how they fit these characteristics.
3. What conditions are necessary for a firm to produce as opposed to shutting down in the short-run?
a. State the condition in terms of totals (total revenue, total cost and/or its components).
b. State the condition in terms of per unit values (namely, price, average cost and/or its components).
Explanation / Answer
(1)
(a)
(i) Pure competition
- Each firm is a price taker
- Demand curve is horizontal at market price
- Profit is maximized by equating price with marginal cost (MC)
- Entry and exit are free
- Numerous buyers & sellers in market
- Each seller sells identical goods
- Even though firms may earn short run excess profit, long run excess profit is zero
(ii) Pure monopoly
- There is a single seller in industry
- Demand curve is downward sloping
- Monopolist maximizes proits by equating marginal revenue (MR) with MC
- No substitute for the good being sold exists
- Barriers to entry are very high
- Monopolist can earn long run excess profits
(iii) Monopolistic competition
- There are numberous buyers and sellers
- Each seller produces similar but slightly differentiated products
- Long run entry and exirt are free
- Each firm maximizes profits by equating MR with MC
- Even though firms may earn short run excess profit, long run excess profit is zero
- Demand curve of each firm is downward sloping
(iv) Oligopoly
- Industry is dominated by a few large sellers
- Price and/or output decision by each firm is interdependent on the price and/or output decision by other firms
- High barriers to entry
- Firms can earn both short run and long run excess profits.
(b)
Super market in hometown - Monopolistic competitor since there are many supermarkets, each selling a slightly differentiated assortment of products, and long run entry barrier is very low.
Steel industry - Oligopoly, since there are very few but large steel producers in a country who dominate the market. Entry barrier is very high (due to fixed costs).
Wheat farm - Perfect competitor, since there are numerous wheat farmers each selling identical good (wheat), there is no barrier to entry and exit.
Commercial bank - Oligopoly, since there are few but large banks in a country who dominate the market. Entry barrier is very high (due to fixed costs in the form of high capital requirement).
Automobile - Oligopoly, since there are very few but large automobile producers in a country who dominate the market. Entry barrier is very high (due to fixed costs in the form of high capital investment).
Note: First question is answered.
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