Chapter 6 Market Structure

Lily is studying different market structures in her economics class. She learns about perfectly competitive markets and is asked to identify which of the following statements is NOT a characteristic of such a market.

• The large number of sellers and buyers will cause the seller and buyer to have no power to determine or control the market price.

• The products produced by each firm in a perfectly competitive market are homogeneous.

• Buyers and sellers have perfect knowledge about market conditions.

• There are barriers to prevent the entry of new firms into the market.

Answer explanation

In a perfectly competitive market, there are no barriers to entry, allowing new firms to enter freely. The correct statement is that barriers exist, which contradicts the characteristics of perfect competition.

Abigail runs a small bakery in a perfectly competitive market. She can maximize her profits when she produces output at a level where:

• Marginal revenue is equal to average profit.

• Marginal revenue is equal to marginal cost.

• Marginal revenue is equal to average variable cost.

• Marginal revenue is equal to average cost.

Answer explanation

Perfectly competitive firms maximize profits when marginal revenue equals marginal cost. This condition ensures that the cost of producing an additional unit is exactly covered by the revenue it generates, optimizing profit.

Aiden is studying economics and learns about different market structures. He wonders about the shape of the demand curve for a perfectly competitive firm. He thinks it is _______________________.

• sloped downwards from left to right.

• perfectly inelastic.

• perfectly elastic.

• sloped upwards from left to right.

Answer explanation

The demand curve for a perfectly competitive firm is perfectly elastic because the firm is a price taker. It can sell any quantity at the market price, but cannot influence the price, leading to a horizontal demand curve.

Isla is studying monopoly markets in her economics class. Which of the following is true about monopoly market?

• In the long run, monopoly firm market will generate supernormal profits.

• Monopoly firm can set the production quantity but not the price.

• Monopoly firm produced output at maximum average cost.

• Monopoly firm will engage in intensive non-price competition.

Answer explanation

In a monopoly market, the firm has significant market power, allowing it to set prices above average costs. This leads to supernormal profits in the long run, as there are high barriers to entry preventing competition.

In a small town, Ethan's Bakery is the only place where residents can buy fresh bread. This situation creates a unique market condition where a single firm controls the total production or sale of a product. What is this market condition called?

• Oligopoly.

• Monopolistic competition.

• Perfect competition.

• Monopoly.

Answer explanation

A monopoly exists when a single firm dominates the entire market for a product, controlling its production and sale. This is distinct from oligopoly, monopolistic competition, and perfect competition, where multiple firms exist.

Scarlett is studying the demand curve for a monopoly firm. She learns that the demand curve for a monopoly firm is ____________.

• Perfectly elastic.

• Inelastic.

• Elastic.

• Perfectly inelastic.

Answer explanation

The demand curve for a monopoly firm is inelastic because it faces a downward-sloping demand. This means that consumers are less sensitive to price changes, allowing the firm to raise prices without losing many customers.

In a local market, Ethan is selling handmade candles, while Liam is selling unique scented soaps. Both of them are trying to attract customers. Which of the following is NOT a characteristic of a monopolistic competition market?

• Implement product differentiation.

• Need huge cost on advertisement.

• Have no power to control price.

• There are many sellers and buyers.

Answer explanation

In monopolistic competition, firms have some power to control prices due to product differentiation. Therefore, the statement 'Have no power to control price' is NOT a characteristic of this market structure.

In a monopolistic competition market, when Aiden runs his coffee shop and finds that at the point MR=MC, the Average Revenue is less than the Average Cost. Therefore, the profit will be called _________.

• Subnormal profit.

• Normal profit.

• Minimum profit.

• Supernormal profit.

Answer explanation

In monopolistic competition, when MR=MC and Average Revenue is less than Average Cost, the firm incurs losses. This situation is referred to as subnormal profit, indicating that the firm is not covering its total costs.

In a business class, Kai, Lily, and Olivia are discussing the characteristics of different market structures. They come across the oligopoly market and debate its features. Which of the following is NOT a characteristic of oligopoly market?

• Few large firms exist in the market.

• Homogeneous and differentiated product.

• There are barriers to enter into the market.

• Existence of price competition.

Answer explanation

In an oligopoly, firms often avoid price competition to maintain profits, instead using non-price competition strategies. Thus, 'Existence of price competition' is NOT a characteristic of an oligopoly market.

In a small town, William and Lily run competing coffee shops. The kinked-demand curve in their oligopoly market is based on the assumptions that ______________.

• There is no product differentiation.

• Other competitors in the market will follow a price increase, but price decrease will be ignored.

• Other competitors will follow the price changes by others.

• Other competitors in the market will follow a price decrease, but price increase will be ignored.

Answer explanation

The kinked-demand curve assumes that in an oligopoly, firms will match price decreases to maintain market share, but will not match price increases, leading to a kinked shape in the demand curve.