01:220:102 Chapter Notes - Chapter 13: Taipei Metro, Marginal Revenue, Perfect Competition
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17 Oct 2013
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1. Characteristics of competitive markets
The model of competitive markets relies on these three core assumptions:
1. | There must be many buyers and sellers a few players can't dominate the market. |
2. | Firms must produce identical products buyers must regard all sellers' products as equivalent. |
3. | Firms and resources must be fully mobile, allowing free entry into and exit from the industry. |
The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry.
Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.
Scenario |
Competitive? |
---|---|
The government has granted the U.S. Postal Service the exclusive right to deliver mail. | ________________ |
Several stores in the mall sell hooded sweatshirts. Each store's sweatshirts reflect the style of that particular store. Additionally, some makers use higher-quality cotton than others, which is reflected in the apparel's prices. | |
Two taxi companies serve most of the market in a big city. Consumers don't care about which taxi company they take if they decide it's worth taking a taxi, they flag down the nearest one. | _________________ |
There are dozens of pasta producers that sell pasta to hundreds of Italian restaurants nationwide. The restaurant owners buy from the cheapest pasta producer available to |
Match the following.
constant-cost industry | A market structure in which a large number of firms sell a homogenous product or service with no restrictions on entry or exit and each firm is a price-taker. |
increasing-cost industry | The demand facing a price-taking firm. |
long-run equilibrium | A firm produces zero output but must still pay its fixed costs. |
marginal revenue product | Price below which a firm shuts down in the short run. |
perfect competition | All firms produce where price equals long-run marginal cost, and economic profits are zero. |
perfectly elastic demand | Industry in which input prices rise as all firms in the industry expand output. |
shut down | Industry in which input prices remain constant as all firms in the industry expand output. |
the shut-down price | The additional revenue earned by hiring one more unit of a variable input. |