Market Structure Analysis PDF

### **Which of the following best describes monopolistic competition?** - - - - **Rationale:** Monopolistic competition is characterised by many firms selling differentiated products, allowing each firm to cater to specific customer preferences. This differentiation could be in quality, b...

### **Which of the following best describes monopolistic competition?** - - - - **Rationale:** Monopolistic competition is characterised by many firms selling differentiated products, allowing each firm to cater to specific customer preferences. This differentiation could be in quality, branding, or customer service. For instance, cafés often compete in the same area but offer unique menus and atmospheres to attract different customer segments. ### **2. A key feature of an oligopoly is:** - - - - **Rationale:** Oligopolies consist of a few large firms that are interdependent, meaning one firm's actions, such as price changes, impact the other firms in the market. An example is the airline industry, where major airlines often react to each other's pricing and promotions to remain competitive. ### **3. In a monopoly, the demand curve is:** - - - - **Rationale:** A monopolist's demand curve slopes downward, showing that to sell more, the monopolist must lower its price. For example, a regional water utility provider has monopoly control over supply, so if it wants to sell additional units of water, it must reduce its rates. ### **4. Which statement is true of firms in a perfectly competitive market?** - - - - **Rationale:** In perfect competition, firms sell identical or "homogeneous" products, meaning there's no distinction between one firm's product and another's. For instance, wheat or raw cotton from different suppliers is virtually the same to consumers, resulting in firms being price takers. ### **5. In monopolistic competition, firms maximise profit by producing at the level where:** - - - - **Rationale:** Firms maximise profit when marginal revenue equals marginal cost. In monopolistic competition, firms have some control over pricing due to product differentiation, like in clothing brands where each firm offers a unique product that slightly influences consumer choice. ### **6. What differentiates monopolistic competition from perfect competition?** - - - - **Rationale:** Monopolistic competition differs because firms offer differentiated products (e.g., various brands of coffee), giving them some pricing power. In contrast, perfect competition features identical products, so firms are price takers. ### **7. Which of the following is an example of a market with oligopolistic characteristics?** - - - - **Rationale:** The smartphone market is dominated by a few key firms like Apple and Samsung. These companies don't operate independently; they respond to each other's product launches and pricing strategies to maintain their market positions. ### **8. A monopoly exists because:** - - - - **Rationale:** In a monopoly, a single firm has total control over the supply of a product or service, with no direct competitors. For example, many regional electricity suppliers have monopolies, as no other company provides the same service in that area. ### **9. Which market structure has no barriers to entry?** - - - - **Rationale:** Perfect competition allows free entry and exit, as there are no significant barriers. This is evident in agricultural markets, where farmers can enter or exit the market based on crop prices and profitability. ### **10. In an oligopolistic market, firms often:** - - - - **Rationale:** In oligopolies, firms closely watch competitors' actions and may adjust their own prices accordingly. Airlines are a classic example, where companies respond to competitors' fare adjustments to maintain market share. ### **11. Monopolistic competition allows firms to:** - - - - **Rationale:** Firms in monopolistic competition have some pricing power because they offer unique products. For instance, each café in a city may set different prices for coffee based on their brand, location, and quality. ### **12. A natural monopoly exists because:** - - - - **Rationale:** In a natural monopoly, one firm can supply the entire market at a lower cost than if there were multiple suppliers. Public utilities, like water companies, are examples where duplication of infrastructure would be inefficient. ### **13. In perfect competition, if a firm tries to charge more than the market price:** - - - - **Rationale:** In perfect competition, firms cannot set their own prices. If they charge more than the market price, consumers will buy from competitors offering the same product at the market rate, as seen in commodity markets like grains. ### **14. In which market structure are consumers least affected by a single firm's pricing decisions?** - - - - **Rationale:** In perfect competition, no single firm can influence the market price due to the presence of many firms selling identical products. Consumers are unaffected by one firm's pricing because alternatives are readily available. ### **15. Barriers to entry in an oligopoly are typically:** - - - - **Rationale:** High barriers in oligopolies, such as the automobile industry, prevent new firms from entering easily. Existing firms have strong brand loyalty and economies of scale, making it costly for new entrants to compete. ### **16. Price-setting power is most common in which market structure?** - - - - **Rationale:** Monopolies can set prices since they face no competition. For example, a local water utility may set rates, as there are no other providers offering the same service in that area. ### **17. Which market structure best describes a company that is the sole provider of a public utility?** - - - - **Rationale:** Public utilities like electricity or water services are often monopolies, where only one provider exists, allowing it to control prices within regulated limits. ### **18. Firms in monopolistic competition differentiate products to:** - - - - **Rationale:** Differentiation, such as branding or unique product features, gives firms in monopolistic competition some control over prices. Examples include various shampoo brands, each marketed with unique benefits to appeal to different consumer preferences. ### **19. In which market structure is product differentiation least important?** - - - - **Rationale:** In perfect competition, products are identical (e.g., grains), so differentiation is unnecessary. Firms compete purely on price, as each product is a perfect substitute for another. ### **20. In monopolistic competition, firms can enter and exit the market:** - - - - **Rationale:** Low entry barriers in monopolistic competition allow new firms to enter the market if they see profit opportunities, and existing firms can exit if they are not profitable. This is often seen in industries like restaurants, where new businesses frequently enter and exit based on demand.