ANSWERS TO END-OF-CHAPTER QUESTIONS
21-1 Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit? (a) a supermarket in your hometown; (b) the steel industry; (c) a Kansas wheat farm; (d) the commercial bank in which you or your family has an account; (e) the automobile industry. In each case justify your classification. Pure competition: very large number of firms; standardized products; no control over price: price takers; no obstacles to entry; no nonprice competition. Pure monopoly: one firm; unique product: with no close substitutes; much control over price: price maker; entry is blocked; mostly public relations advertising. Monopolistic competition: many firms; differentiated products; some control over price in a narrow range; relatively easy entry; much nonprice competition: advertising, trademarks, brand names. Oligopoly: few firms; standardized or differentiated products; control over price circumscribed by mutual interdependence: much collusion; many obstacles to entry; much nonprice competition, particularly product differentiation. (a) Hometown supermarket: oligopoly. Supermarkets are few in number in any one area; their size makes new entry very difficult; there is much nonprice competition. However, there is much price competition as they compete for market share, and there seems to be no collusion. In this regard, the supermarket acts more like a monopolistic competitor. Note that this answer may vary by area. Some areas could be characterized by monopolistic competition while isolated small towns may have a monopoly situation. (b) Steel industry: oligopoly within the domestic production market. Firms are few in number; their products are standardized to some extent; their size makes new entry very difficult; there is much nonprice competition; there is little, if any, price competition; while there may be no collusion, there does seem to be much price leadership. (c) Kansas wheat farm: pure competition. There are a great number of similar farms; the product is standardized; there is no control over price; there is no nonprice competition. However, entry is difficult because of the cost of acquiring land from a present proprietor. Of course, government programs to assist agriculture complicate the purity of this example. (d) Commercial bank: monopolistic competition. There are many similar banks; the services are differentiated as much as the bank can make them appear to be; there is control over price (mostly interest charged or offered) within a narrow range; entry is relatively easy (maybe too easy!); there is much advertising. Once again, not every bank may fit this model—smaller towns may have an oligopoly or monopoly situation. (e) Automobile industry: oligopoly. There are the Big Three automakers, so they are few in number; their products are differentiated; their size makes new entry very difficult; there is much nonprice competition; there is little true price competition; while there does not appear to be any collusion, there has been much price leadership. However, imports have made the industry more competitive in the past two decades, which has substantially reduced the market power of the U.S. automakers. Strictly speaking, pure competition never has existed and probably never will. Then why study it? It can be shown that pure competition results in low-cost production (productive efficiency)— through long-run equilibrium occurring where P equals minimum ATC—and allocative efficiency—through long-run equilibrium occurring where P equals MC. Given this, it is then possible to analyze real world examples to see to what extent they conform to the ideal of plants
Pure Competition producing at their points of minimum ATC and thus producing the most desired commodities with the greatest economy in the use of...
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