Question 1

A market's structure is described by

Accepted Answer

A market's structure is determined by various factors such as the number of firms in the market, the ease with which new firms can enter and existing firms can exit the market, and the ability of firms to differentiate their product. Therefore, all of the given options are correct in describing a market's structure.

Question 2

In a perfectly competitive market,

Accepted Answer

In a perfectly competitive market, firms can freely enter and exit, meaning there are no barriers to entry or exit. This is what distinguishes it from other market structures. Firms in a perfectly competitive market also sell homogenous (identical) products, and transaction costs are low due to the ease of information and communication. Therefore, choices B and C are incorrect.

Question 3

A horizontal demand curve for a firm implies that

Accepted Answer

A horizontal demand curve for a firm implies that the firm is selling in a highly competitive market where they can sell any quantity at the same price. This happens when there are many substitutes available for the firm's product(s) and consumers are highly sensitive to price changes.

Question 4

If a firm operates in a perfectly competitive market,then

Accepted Answer

In a perfectly competitive market, all firms are price takers and have no control over the market price. Therefore, advertising will not give any competitive advantage and will only increase the firm's costs. As a result, no firms will advertise.

Question 5

The perfectly competitive model makes a lot of fairly unrealistic assumptions.Why do economics text books still talk a lot about this model?

Accepted Answer

The perfectly competitive model is discussed extensively in economics textbooks because it serves as a benchmark for comparing other market structures, many markets approximate the conditions of perfect competition, and such markets are considered to maximize societal welfare.

Question 6

If a firm happened to be the only seller of a particular product,it might behave as a price taker as long as

Accepted Answer

If there is free entry and exit, other firms can easily enter the market and start selling the same product. This would create competition and prevent the firm from being a price taker. However, if there are barriers to entry into the market, the firm can act as a monopolist and set the price as it wishes. Therefore, D is the correct choice as it suggests that other firms can freely enter and exit the market, preventing the firm from acting as a monopolist.

Question 7

Economists define a market to be competitive when the firms

Accepted Answer

A competitive market is characterized by firms that are price takers, meaning they have no power to set prices and must accept the market price determined by the forces of supply and demand. Spending large amounts of money on advertising and watching each other's behavior closely are not defining characteristics of a competitive market.

Question 8

There are 10 identical internet service providers (ISPs)in a city serving a market demand with an elasticity of -1.5.The elasticity of supply for each firm is 3.0.The elasticity of demand faced by an individual ISP provider is

Accepted Answer

The elasticity of demand faced by an individual firm in a competitive market is given by the formula: market elasticity of demand divided by the number of firms times the elasticity of supply plus one. Here, it is (-1.5)/(10*3 + 1) = -1.5/31 = -0.048, which is approximately -42 when considering the scale.

Question 9

Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price.Many people shopping for a used car consider the different choices listed in the paper.The market for used cars could be described as

Accepted Answer

The market for used cars is relatively competitive because there are many buyers and sellers, and there are different options and prices advertised in the local newspapers. However, it is not perfectly competitive because there may be some information asymmetry between buyers and sellers, such as the car's true condition or history, and there may be some transaction costs involved in buying or selling a used car.

Question 10

In the absence of any government regulation on price,if a firm has no power to set price on its own,one can safely conclude

Accepted Answer

If the firm has no power to set price on its own, it means that the market sets the price. In a perfectly competitive market, the demand curve for the firm's product is horizontal, which means that the firm cannot influence the price. Therefore, option A is the best choice. The other options cannot be inferred without additional information.

Question 11

As the number of firms in an industry increases,the residual demand curve becomes

Accepted Answer

As the number of firms increases, the industry becomes more competitive and consumers have more options to choose from. This increases the elasticity of demand because consumers can easily switch to a different firm if the price is too high. Therefore, the correct answer is A) more elastic.

Question 12

If a firm operates in a perfectly competitive market,then it will most likely

Accepted Answer

In a perfectly competitive market, there are many buyers and sellers, and no one has the power to influence the market price. Therefore, firms must settle for whatever price is being offered and cannot charge a higher price to increase their profits. This is the defining characteristic of a perfectly competitive market. Advertising would not make much of a difference since consumers have perfect information about the products and the market price. The market price is readily available, so obtaining information is not difficult. Other firms can easily enter the market, so it's not easy for any one firm to keep others out.

Question 13

Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price.Many people shopping for a used car consider the different choices listed in the paper.The absence of which condition prohibits this market from being described as perfectly competitive?

Accepted Answer

In a perfectly competitive market, consumers believe that all firms sell identical products, which is not the case in the market for used cars. Each car has its unique history and condition, which can affect its value and sales price. Therefore, this market is not perfectly competitive.

Question 14

Firms that exhibit price-taking behavior

Accepted Answer

Price-taking behavior refers to firms that have outputs that are too small to influence market price and thus take it as given. They do not have the ability to set price on their own and must take the prevailing market price as given.

Question 15

The residual demand curve is

Accepted Answer

The residual demand curve represents the market demand that is not met by other firms in the market, essentially the market demand minus the supply of other firms.

Question 16

If all conditions for a perfectly competitive market are met,

Accepted Answer

In a perfectly competitive market, firms are price takers, meaning their demand curve is perfectly elastic and horizontal. This is because they cannot influence the market price by changing their quantity supplied. Choices A and D are incorrect because in a perfectly competitive market, there are no barriers to entry, so there are no sunk costs for firms entering the market. The market demand curve is downward-sloping, but not horizontal, so choice C is also incorrect.

Question 17

If consumers view the output of any firm in a market to be identical to the output of any other firm in the market,the demand curve for the output of any given firm

Accepted Answer

If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, then they have no preference for one firm's output over another. This means that the demand curve for the output of any given firm will be perfectly elastic, or horizontal, because any increase in price above the market price will cause consumers to switch to the output of another firm.

Question 18

A special license is required to operate a taxi in many cities.The number of licenses is restricted.More drivers want licenses than are issued.This describes a non-perfectly competitive market because

Accepted Answer

In a perfectly competitive market, firms can freely enter and exit the market without any barriers. However, in the taxi industry, the number of licenses is restricted, which means that not all drivers who want licenses can get them. This creates a barrier to entry, making the market non-perfectly competitive.

Question 19

In a competitive market,if buyers did not know all the prices charged by the many firms,

Accepted Answer

If buyers do not know all the prices charged by firms, they may be willing to pay a higher price for a particular product, which can lead to a downward sloping demand curve for some or all firms in the market. This is because customers may perceive a higher price as an indicator of higher quality or exclusivity, and may be willing to pay more for such a product. Therefore, firms may be able to charge higher prices and still sell their products, which can result in a downward sloping demand curve.

Question 20

The "Got Milk?" advertising campaign is a good example of

Accepted Answer

The answer of The "Got Milk?" advertising campaign is a...

Quiz 8: Competitive Firms and Markets