Problem 1
A competitive industry has free entry and exit. Why does free exit matter? How would the analysis change if it was costly to exit?
Problem 2
We rarely see a perfectly competitive market because all the assumptions underlying competitive markets rarely hold together in reality. Why do we need to study something that may not exist in the real world?
Problem 3
Compare perfect competition and monopoly on the basis of: a. the number of buyers and sellers. b. the market supply curve. c. the nature of the good sold in the market.
Problem 4
True or False (a) In a monopoly market, the social welfare is always lower than in a competitive market. (b) Price discrimination is likely to be most effective when the good being sold is a standardized commodity. (c) A firm charges different prices to customers buying different quantities. This is an example of third-degree price discrimination.
Problem 5
Common fallacies Why are these statements wrong? (a) Since competitive firms break even in the long run, there is no incentive to be a competitive firm. (b) By breaking up monopolies, we always get more output at a lower price.
Problem 7
Draw a diagram showing a competitive industry in short-run equilibrium. Suppose this is the wool industry. The development of artificial fibres reduces the demand for wool. (a) Show what happens in the short run if all sheep farmers have identical costs. (b) What happens in the long run if there are high-cost and low-cost sheep farmers in the industry?
Problem 12
Consider a perfectly competitive firm that has a total cost of producing output given by: \(T C=10 Q+2 Q^{2}\). The market price is \(P=54\). Find the profitmaximizing quantity produced by the firm.
Problem 13
Consider a perfectly competitive firm that has a total cost of producing output given by: \(T C=10 Q+2 Q^{2}\). The market price is \(P=54\). Find the profitmaximizing quantity produced by the firm.
Problem 14
A firm's market power can be measured by its ability to raise price above marginal cost. Relative to the level of marginal cost, this measure is \((P-M C) / P\). How do you expect this to be related to the elasticity of demand for the monopolist's output?
