ECON 101 Chapter Notes - Chapter 4: Shortage, Economic Equilibrium, Frozen Yogurt
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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 an identical product buyer must regard all sellers' products as equivalent. |
3. | Firms and resources must be fully mobile, allowing for 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 behaviour, 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.
Is the scenario | Competitive? |
---|---|
Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks. | |
In a major metropolitan area, one chain of coffee shops has gained a large market share because customers feel its coffee tastes better than that of its competitors. | |
Scholastik Inc. owns the U.S. copyright to a popular book series. It is the only company with the legal right to publish books in the series in the United States. | |
In a small town, there are two providers of broadband Internet access: a cable company and the phone company. The Internet access offered by both providers is of the same speed. |
1
The following table shows the market demand schedule and supply schedule for notebooks.
Price ($/unit) |
Quantity Demanded (units) |
Quantity Supplied (units) |
1 |
20 |
4 |
2 |
16 |
6 |
3 |
14 |
10 |
4 |
12 |
12 |
5 |
10 |
14 |
6 |
7 |
17 |
7 |
4 |
20 |
8 |
2 |
22 |
9 |
1 |
25 |
Refer to the table above. Assume that the market for notebooks is in equilibrium.
1. Which of the following is likely to happen if there is an increase in the school enrollment rate, everything else remaining unchanged?
A. Both the equilibrium price and quantity of notebooks decrease.
B. The equilibrium price and quantity remain unchanged.
C. Both the equilibrium price and quantity of notebooks increase.
D. The equilibrium price increases, but the equilibrium quantity of notebooks decreases.
2. A shortage occurs in a market when:
A.price is lower than the equilibrium price.
B. price is higher than the equilibrium price.
C. supply exceeds demand.
D. the marginal utility of consumption is negligible.
3. A change in the quantity demanded of a good is:
A. the outcome of a change in income.
B. the outcome of a change in tastes and preferences.
C. represented by a shift to a new demand curve.
D. represented by a movement along the demand curve.
4. The following table shows the demand schedules of three consumers of wine. Assume that these three buyers constitute the entire market.
PRICE ($/Bottle) |
Sandra's Demand (Bottles) |
David's Demand (Bottles) |
Mary's Demand (Bottles) |
â$8 |
2 |
10 |
|
â$6 |
14 |
15 |
18 |
â$4 |
23 |
24 |
|
â$2 |
24 |
27 |
28 |
Refer to the table above. If the market price of wine is $8/bottle, and the market demand for wine is 19 bottles, David's consumption of wine is:
A. 12 bottles.
B. 9 bottles.
C. 4 bottles.
D. 7 bottles.
5. Which of the following factors will NOT cause a shift in the demand for a good?
A. A change in the number of consumers
B. A change in the market price of the good
C. A change in tastes and preferences
D. A change in consumer incomes
6. Are all markets perfectly competitive?
A. No, there are other market types where firms have considerable power to control the price.
B. Yes, any economic system with a market structure is by definition perfectly competitive.
C. No, there are also command and control markets that are run by a central government.
D. No, in other types of markets, sellers offer identical goods and simply accept the market price.
7. Assume that a seller in a perfectly competitive market charges more than the equilibrium price. It is likely that this seller will:
A. increase his profit.
B. lose only a few buyers.
C. increase his sales.
D. lose almost all of his buyers.
8. The willingness to pay for a commodity:
A. increases as the consumption of the commodity increases.
B. is always less than the market price of the commodity.
C. decreases as the consumption of the commodity increases.
D. is always greater than the market price of the commodity.
9. Which of the following is likely to lead to a right shift in the supply curve of cotton?
A. An increase in labor productivity due to training programs
B. A rise in labor costs due to wage demands by labor unions
C. An increase in the price of cotton
D. A decrease in the price of cotton
10. The buyers of a good will want to purchase it as long as their willingness to pay for the good is:
A. equal to zero.
B. greater than or equal to the price.
C. greater than zero.
D. less than the price.