Chapter 10

Question 1

What are the key features of Perfect competition market ?

Answer 1

~ Number of firms = So many that no firm can influence the market price
~ Nature of product = Homogenous/standardized
~ Entry = completely free
~ Information = Complete
~ Collusion = Impossible
~ Firms control over the price of the product = None
~ Demand curve for the firms product = Horizontal (perfectly elastic)
~ Long-run economic profit = Zero (normal profit only)

Question 2

What are the key features of a monopolistic competition market ?

Answer 2

~ Number of firms = So many that each firm thinks others will not detect its actions
~ Nature of product = Heterogeneous/differentiated
~ Entry = free
~ Information = Incomplete
~ Collusion = Impossible
~ Firms control over the price of the product = some
~ Demand curve for the firms product = Downward-sloping
~ Long-run economic profit = Zero (normal profit only)

Question 3

What are the key features of a monopolistic competition market ?

Answer 3

~ Number of firms = So many that each firm thinks others will not detect its actions
~ Nature of product = Heterogeneous/differentiated
~ Entry = free
~ Information = Incomplete
~ Collusion = Impossible
~ Firms control over the price of the product = some
~ Demand curve for the firms product = Downward-sloping
~ Long-run economic profit = Zero (normal profit only)

Question 4

What are the key features of an Oligopoly market structure ?

Answer 4

~ Number of firms = So few that each firm must consider the others’ actions and reactions
~ Nature of product = Homogenous or Heterogeneous
~ Entry = varies from free to completely restricted
~ Information = Incomplete
~ Collusion = Possible
~ Firms control over the price of the product = Considerable, but less than in a monopoly
~ Demand curve for the firms product = Downward-sloping, may be kinked
~ Long-run economic profit = May be positive

Question 5

What are the key features of a Monopoly market structure ?

Answer 5

~ Number of firms = One
~ Nature of product = A unique product with no close substitutes
~ Entry = completely blocked
~ Information = Complete
~ Collusion = Irrelevant
~ Firms control over the price of the product = Considerable, but limited by market demand and the goal of profit maximisation
~ Demand curve for the firms product = Market demand curve (Downward-sloping)
~ Long-run economic profit = May be positive

Question 6

What is a price taker ?

Answer 6

Firms that cannot influence the price of their products (Perfectly competitive firms )

Question 7

What is a price maker/setter ?

Answer 7

Firms that have some influence on the price of their products ( monopolists and imperfectly competitive firms)

Question 8

What is the shut-down rule ?

Answer 8

A firm should produce only if total revenue is equal to or greater than total variable cost (includes normal profit)

• in terms of unit costs = a firm should produce only if average revenue is equal to or greater than average variable cost

Question 9

What doess the profit-maximizing rule say ?

Answer 9

Firms should produce that quantity of the product such that profits are maximized, or losses minimized.

~ In terms of TR and TC = Profits are maximized when the positive difference between total revenue and total cost is the greatest

~ In terms of MR and MC = profit is maximized where MR is equal to MC