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Chapter 12: Problem 4

Explain whether each of the following is a perfectly competitive market. For each market that is not perfectly competitive, explain why it is not. a. Corn farming b. Coffee shops c. Automobile manufacturing d. New home construction

Short Answer

Expert verified
a. Corn farming is a perfectly competitive market. b. Coffee shops are not a perfectly competitive market because the products are not identical and there are significant entry barriers. c. Automobile manufacturing is not a perfectly competitive market due to product differentiation and high barriers to entry. d. New home construction is not a perfectly competitive market because products aren't identical and there are significant barriers to entry.

Step by step solution

01

Analyze the first item: Corn Farming

Corn farming can be considered a perfectly competitive market because there are a multitude of sellers and buyers. In addition, the product (corn) is homogenous or identical across different producers. Lastly, there are no significant barriers to entering the market.
02

Analyze the second item: Coffee shops

Coffee shops, on the other hand, cannot be considered a perfectly competitive market because even though there may be many buyers and sellers, the products are not identical. The quality, taste, serving size, and branding of coffee can greatly vary from one shop to another. Also, there might be significant barriers to entry like high startup costs.
03

Analyze the third item: Automobile manufacturing

Automobile manufacturing is not a perfectly competitive market because the products are not identical and there are significant barriers to entry, such as high start-up costs and proprietary technology.
04

Analyze the fourth item: New home construction

New home construction is not a perfectly competitive market. Although there are many buyers and sellers, the products (houses) are not identical, and there can be significant barriers to entry, including huge startup costs.

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Most popular questions from this chapter

Explain why it is true that for a firm in a perfectly competitive market, the profit-maximizing condition \(M R=M C\) is equivalent to the condition \(P=M C\).

When are firms likely to enter an industry? When are they likely to exit an industry?

Frances sells pencils in the perfectly competitive pencil market. Her output per day and her total cost are shown in the following table: $$ \begin{array}{|c|c|} \hline \text { Output per Day } & \text { Total Cost } \\ \hline 0 & \$ 1.00 \\ \hline 1 & 2.50 \\ \hline 2 & 3.50 \\ \hline 3 & 4.20 \\ \hline 4 & 4.50 \\ \hline 5 & 5.20 \\ \hline 6 & 6.80 \\ \hline 7 & 8.70 \\ \hline 8 & 10.70 \\ \hline 9 & 13.00 \\ \hline \end{array} $$ a. If the current equilibrium price in the pencil market is \(\$ 1.80,\) how many pencils will Frances produce, what price will she charge, and how much profit (or loss) will she make? Draw a graph to illustrate your answer. Your graph should be clearly labeled and should include Frances's demand, \(A T C, A V C, M C,\) and \(M R\) curves; the price she is charging; the quantity she is producing; and the area representing her profit (or loss). b. Suppose the equilibrium price of pencils falls to \(\$ 1.00\). Now how many pencils will Frances produce, what price will she charge, and how much profit (or loss) will she make? Show your work. Draw a graph to illustrate this situation, using the instructions in part (a). c. Suppose the equilibrium price of pencils falls to \(\$ 0.25 .\) Now how many pencils will Frances produce, what price will she charge, and how much profit (or loss) will she make?

Suppose that most wheat farms are suffering losses. Now suppose that a new scientific study shows that eating four slices of whole wheat bread per day is an effective means of weight control, lowers blood pressure, and reduces the likelihood of heart disease. Assume that this study leads to the typical wheat farm earning an economic profit. Use two graphs to illustrate the effect of the release of the study: one graph showing the effect on the market for wheat and another graph showing the effect on a representative wheat farm. Be sure your graph for the wheat market shows any shifts in the market demand and supply curve and any changes in the equilibrium market price. Be sure that your graph for the representative farm includes its marginal revenue curve, marginal cost curve, average total cost curve, any change in its demand curve, and the area showing its loss before the release of the study and its profit after the release.

(Related to Solved Problem 12.6 on page 439 ) Sony suffered losses selling televisions from 2004 to \(2013,\) before finally earning a small profit on this business from 2014 to 2016. Given the strong consumer demand for plasma, LCD, and LED television sets, shouldn't Sony have been able to raise prices to earn a profit during that decade of losses? Briefly explain.
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