Barber shops in a large city would seem to be an example of a competitive market

Question

Barber shops in a large city would seem to be an example of a competitive markets, since there are many sellers operating relatively small shops, each seller takes the price of haircuts as given, and the products (haircuts) are very similar between different shops.

Question 8

How could you argue that the barber shop market is not competitive?

Select one:

a. Since barber shops do not sell any physical or tangible items to customers, the prices charged are not constrained by market forces and can be unusually high or low.

b. Many barber shops may be locally-owned, but are franchises of single major corporation. Thus, the market is not competitive since it is ultimately only served by one supplier.

c. Each barber shop sells a very differentiated product to its clients, since it is rare that two clients receive the exact same haircut (perfect substitute).

d. Most barber shops only serve clients who live relatively close by. A barber shop on one side of town usually does not attract clients who live or work many miles away on the other side of town. Thus, barber shops tend to only compete with the relatively few other barber shops that are nearby.

Question 9

Is it possible that each barber shop could face a demand curve that is not perfectly elastic?

Select one:

a. No; since clients are not willing to accept price changes for their haircuts from one month to the next (e.g., $15 haircut this month, $20 haircut next month, etc.), the price will remain constant in the long run and thus demand is perfectly elastic.

b. Yes; demand is only perfectly elastic if the demand curve is upward-sloping, and barber shop demand is downward-sloping.

c. No; each barber shop in a large city is indistinguishable from the others (i.e., they are perfect substitutes), and so demand for any individual barber shop is perfectly elastic.

d. Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since clients will not stop at every barber shop in the city to find the cheapest price), then they will not face perfectly elastic demand.

Question 10

How profitable do you expect barber shops to be in the long run?

Select one:

a. Since they are usually very small, most barber shops will be unable to compete with larger firms with higher fixed and variable costs. Barber shops should expect losses in the long run.

b. Even with a small amount of market power due to attracting only local clients, it is still relatively easy to enter and exit the barber shop industry. Long-run profits will likely be driven down close to zero.

c. Improvements in hair-cutting technology, and the difficulty of new entrepreneurs entering this market, will guarantee above-normal profits for barber shops for the next few decades.

d. Barber shops have the ability to set their own price above the market equilibrium price for a considerable length of time given their small size and the sheer number of other barber shops. Most individual barber shops will enjoy positive economic profit in the long run.

Explanation / Answer

Ans

1 D is right. They satisfy local people

2 D is right. No need to explain as it is self explanatory

3 B is really right. Less barriers to entry will reduce profits

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