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Unformatted text preview: 6. Perfectly Competitive Markets Multiple Choice 1. Which of the following is NOT a characteristic of a perfectly competitive market? a) All firms have equal access to technology in the long run. b) All consumers have perfect information about prices. c) All firms must be identical. d) Each buyer's purchases must have an imperceptible effect on market price. Ans: c Response: A perfectly competitive market has four characteristics : (1) Each buyer's purchases are so small that he/she has an imperceptible effect on market price. Further, each seller's sales are so small that he/she has an imperceptible effect on market price. When both buyers and sellers are small in this way, we call the industry fragmented . (2) Firms produce undifferentiated products in the sense that consumers perceive the products to be identical. In other words, the products may be physically the same or, if they are not the same, the differences do not in any way affect consumers' demand (or valuation) of the product. (3) Consumers have perfect information about the prices all sellers in the market charge. (4) Finally, all firms (both current industry participants and potential new entrants to the industry) have equal access to resources (such as technology and raw materials). The first three assumptions are necessary for the market to be perfectly competitive in the short run. The fourth assumption must be added to define perfect competition in the long run. 2. Which of the following statements could be true for a perfectly competitive industry? a) Exit and entry occur only in the short run. b) Exit and entry may occur in either the short or the long run. c) The firm's supply curve is flat in the long run. d) The industry's supply curve is flat in the long run. Ans: d Response: (a), (b) and (c) are incorrect. Exit and entry are long run decisions only. This is why significant profits (or losses) can exist in the short run in a perfectly competitive industry: entry and exit do not occur in the short run to discipline profits. The firm's supply curve is the rising portion of the firm's marginal cost curve above the shut-down point in the long run as well as in the short run. (d) may be correct if entry of new firms into the industry does not change the cost of inputs to production. This assumption need not always hold, however. For example, the long run market supply curve is upward-sloping when the average cost curve shifts up as input prices rise due to an increase in industry output. Such an industry is called an increasing cost industry. This is more likely to be the case when firms use industry specific inputs, which are scarce inputs that only firms in this industry use. For example, a recent boom in the worldwide sales of Tequila has driven up the price of the special type of agave plant used in the fermentation stage. In contrast, when changes in industry output have no effect on input prices, we call the industry a constant cost industry....
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This note was uploaded on 12/27/2011 for the course FBAE 201 taught by Professor Eefwf during the Spring '11 term at Institute of Technology.
- Spring '11