Quiz 3
1. List the characteristics of the four different types of market structures
discussed in class and give an example of each.
Answer:
Perfect Competition
The characteristics of Perfect Competition are as follows• Many Buyers and Sellers in the Market
• Products sold are identical
• Easy to Enter the Market
Example: Staple foods, daily goods, etc.
Monopoly Competition
The characteristics of Monopoly Competition are as follows• One firm operating in the market
• Products sold are differentiated
• Difficult to enter the market
Example: WASA, Titas Gas, DESCO, etc.
Monopolistic Competition
The characteristics of Monopolistic Competition are as follows• Many Buyers and Sellers in the Market
• Products sold are differentiated
• Easy to Enter the Market
Example: Restaurants, hair salons, beauty industry, clothing store, etc.
Oligopoly Competition
The characteristics of Oligopoly Competition are as follows• Few firms operating in the market
• Products sold may be are differentiated
• Difficult to enter the market
Example: Telecommunication, aviation, gold suppliers, etc.
2. Suppose you start a business of manufacturing computer software. Assume
that this computer software company is a perfectly competitive firm. Your
fixed cost per month is Tk. 40,000 and total cost is Tk. 120,000. You sell 100
software per month and average revenue is Tk. 80, what should be your shortrun decision regarding shut down and long-run decision regarding exit?
Answer:
Given,
Total Cost, TC = Tk. 120000
Fixed Cost, FC = Tk. 40000
Quantity, Q = 100
Price (P) = Average Revenue (AR) = Tk. 80
Now,
Average Total Cost, ATC = Tk. (120000/100) = Tk. 1200
Average Fixed Cost, AFC = Tk. (40000/100) = Tk. 400
Average Variable Cost, AVC = Tk. (1200 - 400) = Tk. 800
As, AVC > P, the firm will shut down in short-run decision.
And,
Average Total Cost, ATC = TC/Q = Tk. (120000/100) = Tk. 1200
As, ATC > P, the firm will exit in the long-run decision.
2nd Method:
Total Revenue, TR = P x Q = Tk. (80 x 100) = Tk. 8000
Variable Cost, VC = TC – FC = Tk. (140000 – 40000) = Tk. 80000
As, TR < VC, the firm will shut down in short-run decision.
And,
Total Revenue, TR = P x Q = Tk. (80 x 100) = Tk. 8000
As, TR < VC, the firm will exit in the long-run decision.
3. On x and y axes, draw ATC, AVC, and MC curves and four alternative demand
curves that the Perfectly Competitive Firm might face.
a) Draw D1 such that the firm makes a profit.
Answer:
b) Draw D2 such that the firm breaks even (profit = 0).
Answer:
c) Draw D3 such that the firm is at its shut down point.
Answer:
d) Draw D4 such that the firm would shut down rather than produce.
Answer: