Question

a. Give three characteristics of a perfectly competitive market. [3 marks] b. List and explain three types of barriers to entry that may be used in a monopoly. [3 marks] c. For a monopolist, why is marginal revenue less than price for every level of output except the first? [4 marks] d. Give the conditions which should exist for price discrimination? [3 marks] e. Draw a diagram to show the long run equilibrium condition of the perfectly competitive firm [4 marks]

Answer 1

Solution-

a) Three characteristics of perfect competitive market are-

I) There are large number of buyers and sellers

(ii) The Sellers only sell homogeneous products so that buyers donot have preference over any specific product.

(iii) There are no barriers to entry or exit of firms.

b) Three types of barriers to entry in a monopoly are as follows -

i) Patent- It is a legal right which is exclusively given to the inventor to make, sell or use the invention for a certain period of time.

ii) Trademark - It is an identifying symbol or name for a particular product. No one other than the creator can use that name or symbol.

iii) Copyright- A copyright is a form of protection provided by the laws of the United States for original works of authorship including literary, dramatic, musical, architectural, cartographic, choreographic, pictorial etc. No one can reproduce, display, or perform a copyrighted work without permission of the author.

(c) For a monopolist, marginal revenue is always less than the price. This is because to sell extra units of the good, it has to lower the price for all the consumers( old and new) Due to price cut, they loss some revenue which they were receiving from the old consumers. Thus for every additional unit, marginal revenue they acquire is less than the price they charge for the product.

d) Following conditions should be there for price discrimination-

i) Price Elasticity of the products in various markets should be different.

ii) Firms must be able to control supply.

iii) Firms should be able to prevent the resale of products from one buyer to another.

e) In the long run, perfect competition equilibrium conditions will be

Price = marginal cost= marginal revenue =min of average cost.