Question

What are the characteristics of a competitive market? What is the relationship of price to average total cost in a competitive market in the short run and the long run? Define “price taker”. What is meant by entry and exit of firms and what does it mean for profitability in the short run and long run?

What is a “natural” monopoly? How is that different from a “government created” monopoly? What is the role of regulation in monopolistic markets? How and why does government exercise power over mergers and acquisitions? How does monopoly affect societal welfare?

What are the attributes of monopolistic competition? Describe the long run equilibrium for price, marginal cost/revenue and profit in a monopolistically competitive market. What are the societal welfare implications of monopolistic competition? What is the role of advertising in monopolistic competition? What are the costs and benefits of advertising?

Define oligopoly. What is a “cartel” and how is it related to oligopoly? What does the “prisoner’s dilemma” explain about oligopolistic behavior?  What are the key elements of antitrust laws and how are they applied/enforced? Cite an example.

Answer 1

Characteristics of a Competitive market:

1. A large number of firms

2. Homogeneous products are sold

3. Free entry and exit in the market

4. Both buyer and seller has perfect knowledge of prices and technology

5. The firm can not influence its price

6. Firms are price takers.

Firms might be able to charge price higher than average total cost in the short run but in the long run, it will be equal to minimum of ATC

Price taker implies that the firms can not decide the price it charges. The market itself decides it and firms can not charge higher or lower than that.

In competitive market, firms can enter and exit the market anytime. In the short run, if firms make profits, in the long run more and more firms will be incentivized to enter the market and the profits made will be reduced to zero.