Question

1. Characteristics of competitive markets The model of competitive markets relies on these three core assumptions:

1. There must be many buyers and sellers—a few players can't dominate the market.

2. Firms must produce an identical product—buyers must regard all sellers' products as equivalent.

3. Firms and resources must be fully mobile, allowing free entry into and exit from the industry.

The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry.

Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.

A few major airlines account for the vast majority of air travel. Consumers view all airlines as providing basically the same service and will shop around for the lowest price.

No, not an identical product

There are hundreds of colleges that serve millions of students each year. The colleges vary by location, size, and educational quality, which enables students with diverse preferences to find schools that match their needs.

No, not many sellers

Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks.

Yes, meets all assumptions

The government has granted a patent to a pharmaceutical company for an experimental AIDS drug. That company is the only firm permitted to sell the drug.

No, no free entry

Answer 1