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Market Structures and Models

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Q5: What are conditions for a perfectly competitive market? Clarify each.

"The MR=MC rule can be stated slightly different under a perfectly competitive firm." Validate this

statement.

Why a demand curve for a Pure Monopoly is more inelastic than a demand curve for a Monopolistic
Competition?

Q7: Briefly explain the relationship between price variable, demand and marginal revenue (MR) in a
perfectly competitive market.

Q8: Write short notes on the following:

(a) Supply curve of a perfectly competitive firm.

b. Allocative and productive efficiency in a perfect competitive market.

c. Excess capacity in a monopolistic competition

(d) Advertising

09: In a perfectly competitive market, firms take the market price as a given, which implies that the
market demand is infinitely elastic. True or False? And why?

Q10: In the long-run a profit maximizing perfectly competitive firm is producing 1000 units of bread.

Marginal revenue for bread (MR) is Tshs. 50. What is the firm's?

Average Fixed Cost (AFC).

Long-run Average Cost (LAC). (c) Total Cost (TC).

(d) Total Revenue (TR).

(e) Total Profit (1)

Q11: A Perfect Competition firm faces a price of Tshs 5 and Total Cost (TC) = Q3 - 5Q2 + 4Q + 65.

Determine using calculus:

The optimal level of output of the firm by the Marginal approach. (b) The maximum profit.

Q12: (a) Strictly speaking, pure competition never has existed and probably never will. Then why are we
studying it?

b. What are the conditions necessary for the existence of a perfectly competitive market structure?
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Q5:

a) Conditions for a perfectly competitive market:

Many buyers and sellers: There are numerous small firms and consumers.

Homogeneous products: Products are identical and consumers cannot differentiate.

Perfect information: Buyers and sellers have access to all relevant information.

Easy entry and exit: Firms can enter or leave the market without barriers.

Price takers: Firms accept the market price as given.

b) "The MR=MC rule can be stated slightly differently under a perfectly competitive firm." Validating this
statement:

In a perfectly competitive firm, MR (Marginal Revenue) is equal to the market price. Therefore, the rule
can be restated as "Price = MC" because in perfect competition, MR is the same as the price due to the
firm being a price taker.

Q6:

A demand curve for a Pure Monopoly is more inelastic than a demand curve for Monopolistic
Competition because in a monopoly, there is only one seller with no close substitutes. Consumers have
no choice but to buy from the monopoly, making demand relatively inelastic. In contrast, in monopolistic
competition, there are many firms offering differentiated products, giving consumers more options and
making demand more elastic.

Q7:

In a perfectly competitive market, the price variable is determined by the intersection of the market
supply and demand. Demand represents what consumers are willing to buy at different prices. Marginal
Revenue (MR) is the additional revenue from selling one more unit. In perfect competition, MR is equal
to the price because a firm can sell as much as it wants at the market price. So, the relationship is Price =
MR.

Q8:
a) Supply curve of a perfectly competitive firm: The supply curve in perfect competition is the portion of
the marginal cost curve that lies above the average variable cost. It shows the quantity a firm is willing to
produce and sell at different prices.

b) Allocative and productive efficiency in a perfectly competitive market: Perfectly competitive markets
achieve allocative efficiency by producing the quantity where price equals marginal cost. They also
achieve productive efficiency by producing at the minimum point of the long-run average cost curve.

c) Excess capacity in monopolistic competition: In monopolistic competition, firms may not produce at
the lowest point on their average cost curve, leading to excess capacity. This occurs because they have
some market power and can charge prices above marginal cost.

d) Advertising: Advertising is a marketing strategy used by firms to differentiate their products in markets
like monopolistic competition. It aims to increase product demand and potentially allows firms to charge
higher prices.

Q9: True. In a perfectly competitive market, firms take the market price as given because they have no
market power to influence it. This implies that the market demand is infinitely elastic because they can
sell any quantity at the given price without affecting it.

Q10:

(a) Average Fixed Cost (AFC) is not provided in the information given. It cannot be determined without
knowledge of fixed costs.

(b) To calculate Long-run Average Cost (LAC), you need more information about the quantity produced
and the associated costs.

(c) Total Cost (TC) is not provided in the information given. You would need data on fixed and variable
costs to calculate TC.

(d) Total Revenue (TR) would be calculated by multiplying the quantity (1000 units) by the given price
(Tshs. 50).
(e) Total Profit (π) would be calculated as Total Revenue (TR) minus Total Cost (TC), which is not given in
the information provided.

Q11:

(a) To find the optimal level of output using the Marginal approach, you would differentiate the Total
Cost (TC) function with respect to quantity (Q) to find the Marginal Cost (MC). Then, set MC equal to the
price (Tshs 5) to determine the level of output.

(b) To find the maximum profit, you would need to calculate the profit function, which is Total Revenue
(TR) minus Total Cost (TC). You'd then find the quantity where this profit is maximized.

Q12:

(a) We study pure competition because it serves as a theoretical benchmark for analyzing market
structures. It helps us understand how competitive markets work in an idealized scenario, even though
it's rare in reality.

(b) Conditions necessary for the existence of a perfectly competitive market structure include many
buyers and sellers, homogeneous products, perfect information, easy entry and exit, and firms being
price takers. However, such conditions are rarely fully met in real-world markets.

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Q16:
a. The statement is false. A monopolist producing at a price and quantity where the
elasticity of demand is -0.5 can still be maximizing profits. Profit maximization occurs
where marginal cost equals marginal revenue, not necessarily where the elasticity of
demand is -1.

b. The statement is not always true. While monopolies can lead to higher prices,
breaking them up or fostering entry may not always be the best solution. It depends on
various factors, including the specific industry and its characteristics.

c. The statement is true. In some cases, imposing a price ceiling on a monopolist may
increase output if the price ceiling is set above the monopolist's marginal cost. This can
lead to a more efficient allocation of resources.

Q17:

a. Two ways in which oligopoly is different from perfect competition are:

1. Number of Firms: Oligopoly typically has a small number of large firms, while
perfect competition has a large number of small firms.
2. Pricing Behavior: Oligopolistic firms often engage in strategic pricing and
interdependence, whereas perfect competition involves price-taking behavior.

b. Two ways in which oligopoly is different from monopolistic competition are:

1. Product Differentiation: Monopolistic competition involves product

differentiation and non-homogeneous products, whereas oligopoly may have
homogeneous or differentiated products.
2. Market Power: Oligopolistic firms have more market power and can influence
prices, while monopolistic competition firms have limited market power due to
many close substitutes.

c. Two ways in which oligopoly is different from monopoly are:

1. Number of Firms: Oligopoly has multiple firms competing, while monopoly has a
single dominant firm with no direct competitors.
2. Pricing Power: Oligopolistic firms have some degree of pricing power and engage
in strategic interactions, whereas a monopolist has significant pricing power and
faces no competition.

Q18:
a. Oligopolistic Industry: An oligopolistic industry is a market structure characterized by
a small number of large firms that dominate the market. These firms often produce
similar or differentiated products and have significant market power.

b. Duopoly: Duopoly is a specific form of oligopoly in which there are only two
dominant firms in the market. These two firms may compete or collude to control the
market.

c. The non-collusive oligopolistic kinked demand curve is derived by assuming that if

one firm raises its price, other firms will not follow suit, but if it lowers its price, others
will match the decrease. This results in a kink in the demand curve at the current price,
reflecting the firm's expectation of a more elastic response to price increases than to
price reductions.

Q19:

Price Leadership:

 Price leadership is a form of implicit collusion in an oligopolistic market where

one dominant firm, the price leader, sets the price, and other firms typically
follow suit.
 It involves the leading firm adjusting prices to maintain stability and avoid price
wars.

Cost-Plus Pricing:

 Cost-plus pricing is a pricing model in which firms set prices by adding a markup
(profit margin) to their production costs.
 It does not involve coordination between firms and is a more individualistic
approach to pricing.

Q20:

Factors that limit entry in the monopoly market structure include:

1. Economies of Scale: Monopolies often benefit from economies of scale, making it

difficult for new entrants to achieve the same cost-efficiency.
2. High Barriers to Entry: Monopolies may erect significant barriers to entry, such as
patents, control over essential resources, and government regulations.
3. Network Effects: In some cases, the value of a monopoly's product or service
increases as more customers use it, creating a natural barrier to entry.
 4. Brand Loyalty: Monopolies may have strong brand loyalty and customer trust,
making it challenging for new entrants to compete.
5. Legal Barriers: Monopolies may be protected by intellectual property rights or
exclusive licenses.

Q21:

a. Average Revenue at Each Price:

 Price 200: Average Revenue = 200

 Price 180: Average Revenue = 180
 Price 160: Average Revenue = 160
 Price 140: Average Revenue = 140
 Price 120: Average Revenue = 120
 Price 100: Average Revenue = 100
 Price 80: Average Revenue = 80

b. Marginal Revenue at Each Price:

 Marginal Revenue is equal to the change in total revenue when output increases
by one unit. Since there is insufficient information to calculate, we cannot provide
specific values.

c. I cannot draw diagrams in this text-based format, but the equilibrium output and
price will occur where marginal cost equals marginal revenue. Without specific marginal
cost data, I cannot provide the exact equilibrium values.

Q22:

Here's a table contrasting monopoly and monopolistic competition:

Monopolistic
Characteristic Monopoly Competition

One dominant
Number of Firms firm Many small firms
 Monopolistic
Characteristic Monopoly Competition

May have
Product unique Products are
Differentiation product differentiated

Barriers to Easy entry and

Firm Entry/Exit entry, no exit exit

Long Run Possible, due Unlikely, due to

Economic Profit to high competition

market power

Q23:

Differences between perfect competition and monopoly:

 Profit-Maximizing Price and Output:

 Perfect Competition: In perfect competition, firms set prices where
marginal cost equals marginal revenue, resulting in an equilibrium where
P=MC. They produce at the efficient output level.
 Monopoly: A monopolist sets prices where marginal cost equals marginal
revenue, but this is typically at a point where P>MC. Monopolies produce
less and charge higher prices than in perfect competition.
 Consumer Surplus:
 Perfect Competition: Consumers enjoy a high level of consumer surplus
due to low prices and efficient output.
  Monopoly: Consumer surplus is lower because prices are higher, and
output is lower.
 Long-Run Economic Profit:
 Perfect Competition: Firms in perfect competition tend to earn zero
economic profit in the long run due to fierce competition.
 Monopoly: Monopolies can sustain economic profit in the long run due to
their market power and lack of competition.

Q24:

You mentioned a graph, but I can't see the graph you're re