Question

2. For each of the following scenarios, determine which market model best describes the scenario. Then identify the number of firms, the type of product, and the ease with which new firms can enter the market under this market structure.

a. Hundreds of colleges serve millions of students each year. The colleges vary by location, size, cost, and educational quality, which enables students to match schools to their diverse preferences

b. Dozens of companies produce plain white socks. The standard technology for producing socks is widely known and available to anyone who wants to enter the business.

c. Three airlines operate between San Francisco and San Diego. There are not enough potential customers to share the route with a fourth airline without causing the average costs of the existing competitors to rise substantially. Consumers view all airlines as the same service and will select the least expensive one.

d. Only one pharmaceutical company has a government patent to sell an experimental drug. Scenario Number of firms

Scenario Number of firms Type of Product Entry and or Exit Market Model

a

b

c

d

Answer 1

a. Since colleges differ from one another in terms of educational facility, this is an example of Monopolistic Competition. There are large number of firms or collges, each selling differentiated product and there are no restrictions on the entry and exit of colleges from the industry.

b. This is an example of Perfect Competition. because there are infinite number of many firms selling identical products in the industry and the entry and exit of firms in the industry is free.

c. This is an example of Oligopoly because there are few firms in the industry selling differentiated product and entry and exit of firms is restricted.

d. This is an example of Monopoly because there is single firm in the industry selling the product which is unique with no close substitute and entry and exir of any firm in the industry is restricted.