Classify each of the following businesses by their characteristics. For parts a. through d., write Pure Competition, Pure Monopoly, Monopolistic Competition or Oligopoly. Answer the questions in parts e. through h.

a. Rick owns a Greek restaurant in a small, rural town. There are four other restaurants in town and five other fast food establishments; however, none of the others sell Greek Cuisine. (6 pts.)

b. Katie owns her own research firm. Much by accident she stumbled onto a chemical combination that, when inhaled, cures the common cold in a matter of minutes with no adverse side effects. She has a patent on the new drug. (6 pts.)

c. Ted and Chris own the only two gas stations in a 40 mile radius. When Ted lowers his price, Chris quickly follows because his sales start to fall off very quickly. Ted experiences the same result when Chris decides to lower his price. (6 pts.)

d. Sophia owns a farm and produces wheat. When she takes her wheat to sell it, she can sell her entire harvest, but she has to accept the going price on the market because there are so many other wheat farmers. (6 pts.)

e. In which market structure is there the greatest opportunity for economic profits? (6 pts.)

f. In which market structure(s) are there no economic profits in the long run? (6 pts.)

g. Letâs assume that Monopolistically Competitive firms in a particular industry are earning short-run economic profits. What will happen? What will the end result be? (7 pts.)

h. Why wonât a purely competitive firm earn economic profits in the long run? (7 pts

Posted Feb 13 2019
AnsweredFeb 13 2019
OC2735543
Harvard University
(a) For Greek food, Rick is a monopolist since no other seller of Greek cuisine is there.

But if the market is for restaurants only, Rick has monopolistic competition because there are 9 sellers in the small market, with slightly differentiated products & services.

(b) Monopoly. The patent will make Katie the sole seller of this new drug, as long as she holds the patent.

(c) This is Oligopoly (Duopoly) with price competition, since there are only 2 sellers who lower own price, in reaction to the other's price reduction.

(d) Perfect competition. This market is characterized by the individual company being a price-taker and the existence of many companies on the market.

(e) In monopoly market there is maxmimum scope for economic profits. This is because, unlike other market structures, the monopolist is the single seller and sets its own price. It can even engage in price discrimination to charge different prices in different market segments, based on the segment's demand elasticity, to maximize profits.

(f) In perfect competition and Monopolistic competition, there is no long run economic profits, All firms earn the minimum (Normal) profit only.

(g) A monopolistic competition is characterized by product dfferentiation. The firms need to continue differentiating their product in future, in order to be able to sell. This increases their cost functions. In the long run, the long-term average cost only matches the price, so no economic profits can be made.

(h) In perfect competition, firms earn economic profits in short run. Since this market structure is characterized by the free entry (and exit) of other companies, other companies will be attracted by this short-term economic profit and enter the market competing for the existing market share. This short-term economic profit will therefore be eroded.

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