Question

1- Ralph's Lawn Service, a monopolistic competitor, offers services that are differentiated from the services of other producers in the industry, it

Select one:

a. faces a perfectly elastic demand curve

b. has some power to control the price it charges

c. faces a perfectly inelastic demand curve

d. produces a product with no close substitutes

e. is a price taker

2- Gillette introduced the first twin-blade shaving razor in 1971. It proved to be a extremely popular. The product earned very large profits for Gillette for quite a few years. However, despite Gillette's introduction in the 1990's of many variations on this multiple-blade razor, there were many other versions and designs available from many companies, including Schick, Bic, and a host of private-label store-brand versions. By 2004, Gillette's profits and stock price had declined significantly and in 2005 Proctor & Gamble Co. bought them.

With only the information given above, an economist would probably explain the drop in Gillette's profits as follows:

Select one:

a. The government has taxed away Gillette's excess profits.

b. Gillette's high profits and success with the multi-blade design attracted many copy-cat products from other firms, increasing price competition.

c. Gillette must have experienced an increase in some important cost of production, resulting in a drop in profits

d. Proctor & Gamble manipulated the market with advertising so as to be able to buy Gillette.

3- Which market structure is most likely to be less efficient but more innovative than perfect competition?

Select one:

a. monopolistic competition

b. monopsony

c. oligopoly

d. monopoly

Answer 1

Ans.1- (B)

A monopolistic competitive firm faces a downward sloping demand curve and since products are differentiated in a monopolistically competitive market so firms have some power to control the price.

Ans.2- (B)

Gillete's high profits will provide incentives to new firms to enter the market which is going to increase competition in the market .

Ans.3- (A)

Monopolistic competition is less efficient because firms don't produce at their minimum point of ATC in the long run. It is more innovative because firms produce differentiated products and there are many substitutes for a product so firms have to be Innovative to maintain their share in the market.