Question

Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which...

  1. Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. 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. “Even if a firm is losing money, it may be better to stay in business in the short run.” Is this statement ever true? Under what condition(s)?
  3. Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive.
  4. “That segment of a competitive firm’s marginal-cost curve that lies above its average-variable-cost curve constitutes the short-run supply curve for the firm.” Explain using a graph and words.
  5. Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters. What is her AFC per poster (not per thousand!) if she prints 1000 posters? 2000? 10,000? What is her ATC per poster if she prints 1000? 2000? 10,000? If the market price fell to 70 cents per poster, would there be any output level at which Karen would not shut down production immediately.
  6. Assume the following cost data are for a purely competitive producer:

Quantity

AFC

AVC

ATC

MC

P= $56

P= $41

P= $32

0

1

$60.00

$45.00

$105.00

$45

2

30.00

42.50

   72.50

40

3

20.00

40.00

   60.00

35

4

15.00

37.50

   52.50

30

5

12.00

37.00

   49.00

35

6

10.00

37.50

   47.50

40

7

   8.57

38.57

   47.14

45

8

   7.50

40.63

   48.13

55

9

   6.67

43.33

   50.00

65

10

   6.00

46.50

   52.50

75

            a. At a product price of $56, will this firm produce in the short run? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? What economic profit or loss will the firm realize per unit of output?

b. Answer the questions of 4a assuming product price is $41.

c. Answer the questions of 4a assuming product price is $32.

  1. Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially justifiable?
  2. Critically evaluate and explain each statement as true or false and compare your response with the answers bellow:

a. Because they can control product price, monopolists are always assured of profitable production by simply charging the highest price consumers will pay.

b. The pure monopolist seeks the output that will yield the greatest per‐unit profit.

c. An excess of price over marginal cost is the market’s way of signaling the need for more production of a good.

d. The more profitable a firm, the greater its monopoly power.

e. The monopolist has a pricing policy; the competitive producer does not.

f. With respect to resource allocation, the interests of the seller and of society coincide in a purely competitive market but conflict in a monopolized market.

Answers: f, f, t, t, t, t.

  1. How does monopolistic competition differ from pure competition in its basic characteristics? From pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing a monopolistic competitor and how that, in turn, affects its economic profit.
  2. Why might price collusion occur in oligopolistic industries? Assess the economic desirability of collusive pricing. What are the main obstacles to collusion? Speculate as to why price leadership is legal in the United States, whereas price-fixing is not.

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