question archive Classify each of the following businesses by their characteristics
Subject:EconomicsPrice:4.87 Bought7
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.
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.
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.
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.
e. In which market structure is there the greatest opportunity for economic profits?
f. In which market structure(s) are there no economic profits in the long run?
g. Let’s assume that Monopolistically Competitive firms in a particular industry are earning short-run economic profits. What will happen? What will the end result be?
h. Why won’t a purely competitive firm earn economic profits in the long run?
Answer:
a) monopolistic competition. Since there are less number of firms and they are dealing in differentiated products.
b) pure monopoly. Because Katie has got a Patent meaning there is no other firm meaning no competition so it becomes a pure monopoly.
c) oligopoly. Because the businesses are interdependent meaning decision of one firm influences the decision of other firm.
d) pure competition. It says that there are so many other wheat farmers and Sophia is a price taker and accepts the market price so it is a case of pure competition.
e) pure monopoly has the greatest opportunity for economic profits. In a monopoly the firm is a price maker and deals to maximize profits.
f) monopolistic competition and pure competition have zero economic profit in the long run
g) in short run monopolistic competition may earn positive profits but in the long run, economic profits will be zero. Because there is free entry and exit of firms meaning firms are free to enter the market and they can exit the market when they wish to. When Market earns positive profits new firms enter the Market and when there is a loss, the existing firms exit the market. This will happen until the economic profit is zero.
h) A purely competitive firm won't earn economic profits in the long run. because there are large number of firms dealing with the same product. Every firm is a price taker and no firm has a control over the price and there are no barriers to entry.