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Case Study: Perfect Competition in Credit Card Industry! In 1997, over $700 billion purchases were charged on credit cards and this total is...
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Question

In a perfectly competitive market, if a firm finds it is producing an amount of output such that its marginal cost is less than its price, it will

1 point


A) immediately shut down for the short run.


B) be maximizing profits.


C) increase its output to increase its profit.


D) decrease its output to increase its profit.


2. In perfect competition, ________. *

1 point

A) there are restrictions on entry into the market


B) firms in the market have advantages over firms that plan to enter the market


C) only firms know their competitors' prices


D) there are many firms that sell identical products


If a perfectly competitive market is in long-run equilibrium and there is a permanent decrease in demand, then

1 point


A) some firms will incur economic losses.


B) firms are no longer maximizing profits.


C) some firms must immediately exit.


D) each firm must produce less output in the new long run equilibrium and earn less economic profit.


Which of the following is FALSE regarding a perfectly competitive firm? *

1 point


A) The firm can charge a lower price than its competitors and thereby sell more output and increase its profits.


B) The firm always earns a normal profit.


C) The firm's marginal revenue is horizontal.


D) The firm's minimum efficient scale is small relative to the market demand.

The short-run supply curve for a perfectly competitive firm is its

1 point


A) marginal cost curve above the horizontal axis.


B) marginal cost curve above its shutdown point.


C) average cost curve above the horizontal axis.


D) average cost curve above its shutdown point.


5. If the firm is producing 4 packets of biscuits, to maximize its profit it will

1 point


A) increase its output.


B) decrease its output.


C) continue producing packets of biscuits.


D) shut down.


6. A firm's shutdown point is the quantity and price at which the firm's total revenue just equals its

1 point


A) total cost.


B) total variable cost.


C) total fixed cost.


D) marginal cost.

. Explain why, in the long run, the price of a product produced by a perfectly competitive industry will be driven down to the minimum long-run average cost.

Why is a perfectly competitive firm's demand curve identical to its marginal revenue curve?

What sort of competition (if any) exists among perfectly competitive firms?

Provide a local example of the perfectly competitive market and describe the commodities it provides, the locations in which this market exists. (3 marks)

A. Use the graph for a perfectly competitive firm producing T-shirts to answer the following questions. Find:The profit maximizing price and quantity. (2 marks)

Graph 2.jpgB. Calculate the profit earned by this firm if it produces at the profit maximizing level of output. A public choice is

1 point


A) a decision that affects one person.


B) a decision that affects no one.


C) a decision made in public.


D) a decision that affects an entire society.


2. When government action leads to inefficiency, it is known as

1 point


A) government failure.


B) government as usual.


C) lack of government trust.


D) politics.


3. The political market place requires all EXCEPT

1 point


A) diplomats.


B) firms.


C) voters.


D) politicians.


4. In the political marketplace, firms do these of the following EXCEPT

1 point


A) vote.


B) pay taxes.


C) evaluate policy proposals of politicians.


D) benefit from public goods and services.


5. A good or service or a resource is non-excludable if

1 point


A) it is possible to prevent someone from enjoying its benefits.


B) it is not possible to prevent someone from benefiting from it.


C) its use by one person decreases the quantity available for someone else.


D) its use by one person does not decrease the quantity available for someone else


6. If it is impossible to prevent someone from benefiting from a good regardless of whether or not the person paid for it, then the good is

1 point


A) non-rival.


B) rival.


C) non-excludable.


D) excludable.


7. Education at a private university is NOT a pure public good because it is

1 point


A) non-rival.


B) excludable.


C) both non-rival and non-excludable.


D) None of the above answers is correct.


8. If the consumption of Good A by one person does not decrease the quantity of Good A available for another person's consumption, then the good is said to be

1 point


A) non-rival.


B) rival.


C) non-excludable.


D) excludable.


9. Which of the following is the BEST example of a private good?

1 point


A) a can of Mountain Dew


B) fish in the ocean


C) cable television


D) national defense


10. Which of the following is the BEST example of a public good?

1 point


A) public transportation by bus


B) clean air


C) community swimming pools for which the user must pay a fee


D) postal services


11. Long Beach Island, off the coast of New Jersey, is considering building a sand barrier to protect the houses on the island from future hurricanes. For residents of Long Beach Island, this barrier system would be a

1 point


A) private good.


B) natural monopoly.


C) common resource.


D) public good.


12. A common resource is ________ and ________.

1 point


A) rival; excludable


B) non-rival; excludable


C) rival; non-excludable


D) non-rival; non-excludable


13. To two hunters, a boar running in a forest is

1 point


A) non-rival and non-excludable.


B) non-rival and excludable.


C) rival and non-excludable.


D) rival and excludable.


The economy's marginal social benefit curve for a public good is equal to the ________.

1 point


A) horizontal sum of the individual demand curves


B) vertical sum of the individual marginal benefit curves


C) horizontal sum of the individual marginal benefit curves


D) vertical sum of the individual supply curves


The construction of the economy's marginal social benefit curve for a public good reflects the fact that

1 point


A) all the individuals can consume the same unit of the good.


B) more than one supplier can provide the good.


C) the same unit of the good cannot be simultaneously shared by more than one person at a time.


D) the government can supply a public good at a lower cost than can a private supplier.


16. John receives a marginal benefit of $80 from one missile. Nick receives a marginal benefit of $50 from one missile. Christina receives a marginal benefit of $65 from one missile. John, Nick, and Christina are the only people in the economy. What is the economy's marginal social benefit from one missile? (2 marks)

1 point


A) $50


B) $65


C) $80


D) $195


The efficient quantity of a public good is provided when the economy's

1 point


A) total benefit from the good equals its total cost.


B) total benefit from the good is less than its total cost.


C) marginal social benefit from the good equals its marginal social cost.


D) marginal social benefit from the good is greater than its marginal social cost.


There are four lighthouses on the island of Sand. If this is the efficient quantity of lighthouses, ________.

1 point


A) the marginal social benefit of the fourth lighthouse equals its marginal social cost


B) total social benefit is zero


C) marginal social benefit minus marginal social cost is a maximum


D) Both answers A and C are correct.


The quantity of a public good supplied by a private market is

1 point


A) smaller than the efficient quantity.


B) equal to the efficient quantity.


C) larger than the efficient quantity.


D) the quantity that maximizes total public benefit.


In an unregulated market, healthcare consumers often

1 point


A) overestimate its benefit.


B) cannot afford the care they need.


C) overestimate their future need.


D) All of the above are correct.

Q21.jpgUse the above table to answer the following questions Tom and Jerry are the only members of society. The table above shows their marginal benefits from defense satellites, a public good. What is the marginal benefit to society from the third satellite?

If the marginal social cost of a satellite is $36, how much is the efficient quantity of satellites?

Q23.jpg

Broomfield city council is deciding how many police officers the city needs. Broomfield's population is 10,000 people. The marginal cost of a police officer is $64,000 per year. The marginal benefit schedule of an average city resident from police protection is shown in the table above. Police protection is a public good. Calculate the marginal benefit for all of Broomfield from hiring the 4th police officer.

Calculate the marginal benefit for all of Broomfield from hiring the 6th police officer.

State the efficient number of police officers in Broomfield.

Graph 2 on office.png

What triggers entry in a competitive market, describe the process that ends further entry. What triggers exit in a competitive market, describe the process that ends further exit. (3 marks)



List the characteristics or features mentioned in the above case study which make this credit card industry perfectly competitive. (3 marks)

Graph 2 on office.png
Case Study: Perfect Competition in Credit Card Industry!
In 1997, over $700 billion purchases were charged on credit cards and this total is
increasing at a rate of over 10 per cent a year. At first glance, the credit card market
would seem to be a rather concentrated industry. Visa, MasterCard and American
Express are the most familiar names, and over 60 per cent of all charges are made using
one of these three cards. But on closer examination, the industry seems to exhibit most
characteristics of perfect competition. Consider first the size and distribution of buyers
and sellers. Although Visa, MasterCard and American Express are the choices of the
majority of consumers, these cards do not originate from just three firms. In fact, there
are over six thousand enterprises (primarily banks and credit unions) in the US that
offers charge cards to over 90 million credit card holders. One person's Visa card may
have been issued by his company's credit union in Los Angeles, while a next door
neighbour may have acquired hers from a Miami Bank when she was living in Florida.
Credit cards are a relatively homogenous product. Most Visa cards are similar in
appearance, and they can all be used for the same purposes. When the charge is made,
the merchant is unlikely to notice who it was that actually issued the card. Entry into
and exit from the credit card market is easy as evidenced by the 6000 institutions that
currently offer cards. Although a new firm might find it difficult to enter the market, a
financially sound bank, even one of modest size, could obtain the right to offer a
MasterCard or a Visa card from the present companies with little difficulty. If the bank
wanted to leave the field, there would be a ready market to sell its accounts to other
credit card suppliers. Thus, it would seem that the credit card industry meets most of |
the characteristics for a perfectly competitive market.
Reference
Prasad, A., 2015. Case Study: Perfect Competition in Credit Card Industry! [Blog] Infinite
Soluzioni Blog, Available at: <http://bkmiba.blogspot.com/2015/08/case-study-perfect-
competition-in.html>.
Graph 2.jpg
MC
ATC
Price and cost (dollars per day)
30
AVC
25
23.5
20
MR
18
15
0
7 8
9 9.5 10
Quantity (T-shirts per day)
Q21.jpg
Q23.jpg
Marginal benefit
Number of
(dollars from the last
police officers
officer
8.00
7.20
6.40
5.60
4.80
4.00
3.20

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