Market Structure Review Questions
1. Which market structure(s) will have zero economic profits in the long run?
- The perfect competition market and the monopolistic competition market will have zero
economic profits in the long run.
2. Which market structure(s) will be a price maker and have barriers to entry?
- The monopoly market and oligopoly market will be price makers and have barriers to
entry.
3. There are currently 8 firms in a particular market. Their firm sales are given in the
table below. (1) What is the four-firm concentration ratio for this industry? (2)
Would you classify it as an oligopoly?
Firm
1
2
3
4
5
6
7
8
Sales
$1,000
$1,500
$2,000
$2,500
$3,000
$1,000
$500
$2,500
4 Largest Firms’ Sales = 3,000 + 2,500 + 2,500 + 2,000 = $10,000
Industry Sales = 1,000+1,500+2,000+2,500+3,000+1,000+500+2,500 = $14,000
 Concentration Ratio (CR) = 10,000/14,000 = 0.7143 = 71.43%
CR = 71,43% > 60% => It is an oligopoly
4. Although market structures vary widely in their characteristics, (1) what is one
common aspect among all of them? (2) What is the potential calculation for your
previous answer?
- The common aspect among all is the principle of supply and demand.
- Potential calculation for market equilibrium:
+ Quantity supplied (QS): the amount of a good or service that producers are willing
and able to offer at a given price.
+ Quantity demanded (QD): the amount of a good or service that consumers are willing
to purchase at a given price.
 When QS = QD, the market reaches equilibrium, meaning that the market is efficiently
allocating resources and satisfying consumer demand.
5. In the long run, (1) which market structures are likely to have their average cost
curve just sit on top of their demand curve? (2) What does this imply for each
market structure? (3) Are there any differences in the market structures you gave in
your previous answer?
- Two market structures are likely to have their average cost curve just sit on top of their
demand curve:
+ Monopoly: There is only one seller with no competitors in the monopoly market. The
monopolist can set its own price, and it will not have to worry about rivals. As a
result, the monopolist's average cost curve will be tangent to its demand curve at the
profit-maximizing output level.
+ Perfect competition: In perfect competition, there are many buyers and sellers, and all
firms produce a homogeneous product. This means that no firm has any market
power, and all firms must take the market price as given. As a result, the average cost
curve for all firms in a perfectly competitive industry will be tangent to the market
demand curve at the industry output level that maximizes profits for all firms.
-
Different between monopoly market and perfect competition market:
Market power
Monopoly
Only one seller
 Yes
Profit
Can make economic profits
Efficiency
Monopolists may not be
efficient because they do not
have the same incentives to
be efficient as firms in
perfectly competitive
market.
Perfect competition
Many sellers with identical
products or services
 No
Cannot make economic
profits in the long run
because new firms will enter
the market
Firms in perfectly
competitive market are
efficient because they are
constantly competing with
each other to produce goods
and services at the lowest
possible cost.
6. What market structure(s) are likely to cause a net loss to societal welfare?
- Monopoly market is likely to cause a net loss to societal welfare.