Chapter 4 Study questions

Each letter represents one of the four types of market structure. Where on this continuum would oligopoly be located?

• a

• b

• c

• d

Answer explanation

Oligopoly is located at the third position on the continuum of market structures. The four types of market structures are perfect competition, monopolistic competition, oligopoly, and monopoly. Oligopoly is characterized by a few dominant firms in the market, with significant barriers to entry for new competitors.

Which two market structures have relatively high barriers to entry?

• Pure competition and monopolistic competition

• Monopolistic competition and oligopoly

• monopoly and oligopoly

• monopoly and monopolistic competition

Answer explanation

Monopoly and oligopoly are the two market structures with relatively high barriers to entry. In a monopoly, a single firm dominates the market, making it difficult for new firms to enter. In an oligopoly, a few large firms control the market, creating significant barriers for new entrants. Pure competition and monopolistic competition have lower barriers to entry, allowing for more firms to participate in the market.

Which characteristic of non-price discrimination is most likely the reason why people choose to buy this watch?

• physical characteristics

• status or image

• location

• level or service

Answer explanation

People are most likely to choose this watch due to its status or image. Non-price discrimination refers to factors other than price that influence consumer decisions. In this case, the watch's status or image appeals to consumers, making it a more attractive purchase option compared to other factors like physical characteristics, location, or level of service.

By being close to the airport, the owner of the business this sign points toward is engaging in a type of

• commodity marketing

• economics of scale

• market power

• non-price competition

Answer explanation

The correct answer is non-price competition. By being close to the airport, the business owner is engaging in non-price competition, as they are using a strategic location to attract customers rather than competing on price. This allows them to differentiate themselves from competitors without lowering prices.

Which of these factors causes a monopolistically competitive firm to have little control over the price of its product?

• the influence of government price supports

• the general weakness of the currency

• the ready availability of substitutes

• the low marginal cost of production

Answer explanation

In a monopolistically competitive market, firms have little control over the price of their product due to the ready availability of substitutes. This means that if they raise their prices, consumers can easily switch to a similar product from a different firm, limiting the original firm's ability to control prices.

Why is the company that makes these jeans considered both monopolistic and competitive?

• It has a monopoly on this color, but it must compete with those who make jeans in other colors.

• It has a monopoly on its own design, but it must compete with other makers of jeans

• Its low price gives it a monopoly, but it must compete with makers of higher-priced jeans.

• Its high price gives it a monopoly, but it must compete with makers of lower-priced jeans.

Answer explanation

The company that makes these jeans is considered monopolistic because it has a unique design that no other company can replicate, giving it a monopoly in that aspect. However, it is also competitive because there are other companies that make jeans, albeit with different designs. Therefore, it must compete with these other companies in the overall jeans market.

This company has a monopoly on the service it provides because

• it is a technological monopoly; no other company has the technology necessary to provide this service.

• it is a patent monopoly; the government has given the company exclusive rights to provide this service.

• it is an industrial monopoly; it bought out all of its competitors that previously provided this service.

• it is a natural monopoly; it would not be efficient for more than one company to provide this service.

Answer explanation

The question asks why a company has a monopoly on the service it provides. The correct answer is that it is a natural monopoly. This means that it would not be efficient for more than one company to provide this service. This could be due to high infrastructure costs or other barriers to entry that make competition impractical.

Which of the following is an example of a natural monopoly?

• an automobile manufacturer

• a supermarket chain

• a subway system

• a construction company

Answer explanation

A natural monopoly occurs when a single firm can serve the entire market demand at a lower cost than any combination of two or more firms. A subway system is an example of a natural monopoly because the infrastructure costs are so high that it wouldn't be cost-effective for multiple companies to build competing networks.

Which of the following industries is most likely to exist in a purely competitive market?

• shoes

• wheat

• bottled water

• personal computers

Answer explanation

The wheat industry is most likely to exist in a purely competitive market. This is because it is a primary sector industry with many producers, low entry and exit barriers, and a standardized product. Other options like shoes, bottled water, and personal computers have higher levels of differentiation and competition.

What is likely to be the MAIN barrier to entry into the business shown here?

• lack of government regulation

• limited consumer demand

• high cost of advertising

• complex technology

Answer explanation

The main barrier to entry into the business shown in the question is 'complex technology'. This implies that the business involves sophisticated technology that may be difficult to understand or replicate, thus posing a significant barrier to entry. Other options like 'lack of government regulation', 'limited consumer demand', and 'high cost of advertising' may pose challenges but are not the main barrier in this context.