Non - Competitive Market

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Questions:

1 Marks

5 x 1 = 5

How many firms are there in a monopoly market?

What are the shapes of AR and MR curves under monopoly?

Under which market form, firm is a price-maker?

Define monopoly.

Willmonopolistfirmcontinueto produce in the short run if a loss is incurred at the best short run level of output?

Generic 6

3 x 6 = 18

Compare between monopoly and monopolistic competition.

Compare between perfect competition and monopoly.

The market demand curve for a commodity and the total cost for a monopoly firm producing the commodity is given by the schedules below. Use information to calculate the following:

Quantity	0	1	2	3	4	5	6	7	8
Price	52	44	37	31	26	22	19	16	13

Quantity	0	1	2	3	4	5	6	7	8
Total cost	10	60	90	100	102	105	109	115	125

(i) The MR and MC schedules
(ii) The quantities for which the MR and MC are equal
(iii) The equilibrium quantity of output and the equilibrium price of the commodity.
(iv) The total revenue, total cost and total profit in equilibrium.

Generic 3

4 x 3 = 12

Explain the feature of few firms in an oligopoly market.

10.

Why AR curve (demand curve) under monopolistic competition is more elastic than AR curve under monopoly?

11.

What is the value of MR when the demand curve is elastic?

12.

Explain why the demand curve facing a firm under monopolistic competition is negatively sloped?

Multiple Choice Question

5 x 1 = 5

13.

Average revenue and price are always equal under:

(a)

perfect competition only

(b)

Monopolistic competition only

(c)

monopoly only

(d)

all market forms

14.

Price discrimination is one of the features of________

(a)

monopolistic competition

(b)

monopoly

(c)

perfect competition

(d)

oligopoly

15.

Under which one of the following forms of market structure does a firm have no control over the price of its product?

(a)

Monopoly

(b)

Monopolistic competition

(c)

Oligopoly

(d)

Perfect competition

16.

Monopolistic competition differs from perfect competition primarily because______

(a)

in monopolistic competition firms can differentiate their products.

(b)

in perfect competition firms can differentiate their products.

(c)

in monopolistic competition entry into the industry is blocked.

(d)

in monopolistic competition there are relatively few barriers to entry.

17.

Which one of the following statement is not a characteristic of monopolistic competition?

(a)

Ease of entry into the industry.

(b)

Product differentiation.

(c)

A relatively large number of sellers.

(d)

A homogenous product.

True or False

5 x 1 = 5

18.

Under monopolistic competition there is only one seller of the product.

(a)

True

(b)

False

19.

Under monopoly a firm sells the goods at a single price.

(a)

True

(b)

False

20.

Under monopoly new firms can enter the industry to raise the supply.

(a)

True

(b)

False

21.

In monopoly, firm is different from industry.

(a)

True

(b)

False

22.

Under monopoly all firms can sell at any price.

(a)

True

(b)

False

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Answers Key:

1 Marks

5 x 1 = 5

()
One firm.

()
Both AR and MR curves slope downwards.

()
Monopoly.

()
'Mono'means single and 'poly' means seller, i.e., single seller. Monopoly is a market situation where there is a single firm selling the commodity and there is no close substitute of the commodity sold by the monopolist.

()
If the monopolist firm incurs loss in the short run, it will stop production in the long run.

Generic 6

3 x 6 = 18

Monopoly	Basis	Monopolistic Competition
Monopoly refers to a market situation where there is a single seller selling a product which has no close substitutes.	Meaning	Monopolistic Competition refers to a market situation in which there are large number of firms selling closely related but differentiated products.
There is a single seller and the monopolist has full control over the supply.	Number of sellers	There are large number of sellers. So, a firm does not have much impact on activities of other firms.
There are no close substitutes of the product. So, there is no competition from new and existing products.	Nature of product	Products are differentiated on the basis of brand, size, colour, shape etc. So, a firm is in a position to influence the price
There is restriction on entry and exit. So, a firm can earn abnormal profits in the long run.	Entry or Exit	Although there is freedom of entry and exit but it is possible only for a competitive firm to enter or leave the industry.
Monopolist is a price-maker as firm and industry are one and the same thing.	Price	Firm is neither a price-taker nor a price maker but has partial control over price due to product differentiation
Downward sloping demand curve is less elastic due to absence of close substitutes.	A demand Curve	Downward sloping demand curve is more elastic due to presence of close substitutes.
Low selling costs are incurred.	Selling cost	Heavy selling costs are incurred on sales promotion.

Perfect Competition	Basis	Monopoly
It refers to a market situation where there are very large number of buyers and sellers dealing in a homogeneous product at a price fixed by the market.	Meaning	Monopoly refers to a market situation where there is a single seller selling a product which has no close substitutes.
There are very large number of sellers and no individual seller has control over activities of other firms	Number of Sellers	There is a single seller and the monopolist has full control over the supply.
The products sold are homogeneous. So, buyers are willing to pay the same price for all products, which leads to uniform price in the market.	Nature of Product	There are no close substitutes of the product. So, there is no competition from new and existing products
Any firm can freely enter or exit from this kind of market. It leads to absence of abnormal profits and abnormal losses in the long run.	Entry and Exit	There is restriction on entry and exit. So, a firm can earn abnormal profits in the long run.
In perfect competition, industry is price maker, firm is price taker because of homogeneous goods.	Price Maker/Taker	Monopolist is a price-maker as firm and industry are one and the same thing.
Buyers .and sellers have perfect knowledge about market conditions.	Level of Knowledge	Sellers and buyers do not have perfect knowledge
Demand curve is perfectly elastic as price remains the same at all levels of output.	Demand curve	Demand curve slopes downwards as more output can be sold only at less price.
Nosellingcosts are incurred as buyers and sellers have perfect knowledge about market conditions.	Selling cost	Selling costs are incurred for informative purposes due to lack of perfect knowledge

(i) Revenue Schedules

Q	P	TR=PxQ	MR=\(\frac{\Delta{TR}}{\Delta{Q}}\)
0	52	0	-
1	44	44	44
2	37	74	30
3	31	93	19
4	26	104	11
5	22	110	6
6	19	114	4
7	16	112	-2
8	13	104	-8

Cost Schedules

Q	TC	MC
0	10	-
1	60	50
2	90	40
3	100	10
4	102	2
5	105	3
6	109	4
7	115	6
8	125	10

(ii) For quantity of 6 units MRis equal to MC.
(iii) Equilibrium quantity of output occurs where MR = MC.
Equilibrium quantity = 6 units
Equilibrium price = Rs.19
(iv) TR = 114
TC = 109
Total profit = TR- TC = 114 - 109 = 5

Generic 3

4 x 3 = 12

(i) The number of sellers in an oligopoly market is small-when there are two or more than two, but not many sellers.
(ii) What matters is that these few sellers account for most of the industry's sales.
(iii) These "few" sellers consciously dominate the industry and indulge in intense competition. Each firm is aware of that it possesses a large degree of monopoly power.
(iv) For example, the market for mobile service provider in India is an oligopolist structure as there are only few producers of mobile service provider. There exists severe competition among different firms and each firm tries to manipulate both prices and volume of production to outsmart each other.

10.

(i) AR curve under both the markets slope downwards.
(ii) However, AR curve under monopolistic competition is more elastic as compared to AR curve under monopoly because of presence of close substitutes.
(iii) AR curve is less elastic in monopoly because of no close substitutes.

11.

When demand curve is elastic (e > 1), MR is positive.
The relationship is given by,
MR=P\(\left( 1-\frac { 1 }{ e } \right) \)
Graphically, it is shown as is given here.

12.

(i) The demand curve of a firm under monopolistic competition is negatively sloped because of product differentiation.
(ii) The product of the sellers are differentiated but close substitutes of one another.
(iii) Each seller has some degree of monopoly power of 'Making' the price. But since there are many close substitutes available, the result is downward sloping and elastic demand curve.

Multiple Choice Question

5 x 1 = 5

13.