1] There are very few perfectly competitive markets in the real world. This is b
ID: 1224990 • Letter: 1
Question
1] There are very few perfectly competitive markets in the real world. This is because:
the minimum efficient scales of production are very high.
the available products are almost impossible to differentiate.
the number of sellers is always increasing as the production technology of successful firms can be easily copied.
there exists perfect information among the consumers
2] The monopoly power of a firm increases if:
the number of sellers increases.
the average cost of production decreases.
the demand curve becomes elastic.
the number of entry barriers decreases.
3] Which of the following can harm the contestable structure of a market?
Large number of buyers
Brand recognition
Homogeneous products
Low startup capital
4] To be in a cartel, every participating firm should:
operate at the same marginal costs.
incur the same fixed costs.
sell their outputs through the same retail chains.
have the same number of manufacturing units.
5] The Bertrand model is associated with:
monopolistic competition.
perfect competition.
price competition.
a contestable market model.
6] Which of the following is true of deep discounting strategy undertaken by a firm?
A price is set by a producer equal to the average cost of its competitor.
It reduces the entry barriers for new firms.
The strategy can be undertaken even by a firm with decreasing returns to scale.
The firm is a large one and has a significant market share.
7] Network effects are associated with products like:
washing machines.
cars.
airline travels.
cell phones.
Explanation / Answer
1. Perfectly competitive market is an environment having understated features-
a. Many buyers and many sellers
b. Products are homogeneous.
c. Free entry and exit
d. all informations are available without any cost.
If homogenity of product is lost, then competitive market will be less. Homogenity will mean a customer cannot differentiate between products of firms. So if a firm increases price a little, all customers will left to rivals. Thus price remains fixed. In practice, this situation is rare. Artificial differentiation is created through advertisment, packaging or by adding some attractive features. Thus homogeeous in real sense is rarely observed.
If minimum effecient scale of operation is very high, then many small firms will not enter the market. So an artificial barrier is created. It will restrict the operation.
Answer: Competition gets restricted, when operation of scale is very high.
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2. Monopoly is a market of single firm. Other firms entry are restricted naturally or artificially. It provides firm to control the price. More the monoply power, higher will be the ability to set price. It depends a lot on the elasticity of product. It is the degree of responsiveness of demand due to a percentage change in price. If elasticity is less than one, then price increase will reduce demand less than expected. It is known as inelastic demand. Here TR will increase due to rise in price. So less is the Elasticity, more will be the monoply power. Opposite situation is elastic. It reduces mooply power.
so monopoly power will increase if average cost of production decrease. It will increase the profit margin. So degree of monopoly power will rise.
Answer: Decrease in average cost of production increases monopoly power.
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3. Brand recognition reduces contestable structure of the market. If customers are loyal to a brand, then they will stick to that brand even its price moves up. In that case contestable structure of the market will be affected. Market will gradually tilt towrds near monopoly environment.
Answer: Brand recognition reduces contestable structure of the market.
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4. Cartel is an agreement where some competiting firms enter an agreement to cooperate with each other. Objective is to reduce unhealthy price competition among them and maximize profit jointly. It will be very effective of firms have almost same marginal and fixed cost. In that case no firm will try to pool it out of cartel. It is oserverd when few firms are costwise in an advantageous position.
Answer: Cartel is appropriate when firrms have same marginal and fixed cost.
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5. Betrand model is a contestable oligopoly model. Here two or more firms are contesting with each other. The decision of one firm, will depend upon the decision taken by other. It is based on pricing. One firm assumes that rival will charge a fixed price. Accordingly it decides its price which can maximize its profit.
Answer: Bertrand model is associated with a contestable market structure.
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6. In deep discounting pricing strategy, a firm will set its price at a very low level. Objective is to prevent others to enter the market. A firm is successful in this strategy if it is very large one and has largest market share.
Answer: Deep discounting strategy is true for a large firm with significant market share.
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7. Net work effects are associated with products like cell phone. Without appropriate net work connectivity it cannot be effective
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