Week 2 – Market Structures – Perfect competition and Monopolies

Question 1

What are some assumptions of a perfectly competitive market

Answer 1

• Many buyers and sellers
• Homogeneous good
• Complete and perfect information
• Sellers are price takers
• Low entry and exit cost

Question 2

What is the golden rule?

Answer 2

the most profitable amount to produce is where marginal revenue = marginal cost

Question 3

What are some assumptions of a monopoly?

Answer 3

• Dominant seller in market
• Price setter Market power
• Profit-maximizing rule: MR = MC
• Barriers to entry

Question 4

What are some barriers to entry?

Answer 4

Barriers to Entry
1.Control of the inputs (e.g., Alcoa and De Beers)
2.Network externalities (e.g., Microsoft)◦Compatibility and widespread usage strengthen network
3.Legal (e.g., First-Class Mail)◦Patents and copyrights
4.Economies of scale (e.g., power companies)◦Can maintain low selling price
◦New entrants can’t compete

Question 5

What is price discrimination?

Answer 5

Price Discrimination
•Ability of a firm to charge different prices to different buyers for same product
•Categories:◦Amount sold
◦Buyer characteristics
•Residual demand: Individual firm’s demand curve; that portion of market demand that is not supplied by other firms in the market