ch 7 - 1 Characteristics of perfect competition The model...

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1. Characteristics of perfect competition The model of perfectly 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 a homogeneous product—buyers 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. Taken together, these three conditions imply that in a perfectly competitive market, all producers and consumers are price takers.
Identify whether or not each of the following scenarios describes a perfectly competitive market, along with the correct explanation of why or why not. Scenario Perfectly competitive?
The government has granted a patent to a pharmaceutical company for an
experimental AIDS drug. That company is the only firm permitted to sell the drug. 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. Several stores in the mall sell hooded sweatshirts. Each store's sweatshirts reflect the style of that particular store. Additionally, some stores use higher-quality cotton than others, which is reflected in the apparel’s prices.
2.The perfectly competitive firm as a price taker
Suppose Cardboard Inc. is one of over a hundred perfectly competitive firms that produce large cardboard boxes for moving. The following graph shows the market demand and supply curves. The equilibrium market price is $20 per large cardboard box. On the following graph, use the green line (triangle symbols) to plot the demand curve facing Cardboard Inc. for large cardboard boxes. Hint: Remember that perfectly competitive firms can sell all their output at the going price.
In a perfectly competitive market, many firms sell a homogeneous product to many buyers. Therefore, if Cardboard Inc. charges even slightly more for a box than other firms charge, it will lose all its customers, because every other firm in the industry is offering customers a lower price. In other words,

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