Question

The model of competitive markets relies on these three core assumptions: There must be many buyers and sellers—a few players can't dominate the market. Firms must produce an identical product—buyers must regard all sellers' products as equivalent. 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. For question 6-7 identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.

1. 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.

Answers:

Not perfect competition because no free entry

Not perfect competition because not an identical product

Not perfect competition because not many sellers

Yes, this perfect compeition because it meets all assumptions

2. 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.

Group of answer choices

Not perfect competition because there is no free entry

Not perfect competition because the product is not identical

Yes, this is perfect competition because it meets all assumptions

Not perfect competition because there are not many sellers

Answer 1

1)

Answer-option c. Not perfect competition because not many sellers.

A few major airlines account for the vast majority of air travel. This indicates that there are a few sellers in the market. Few sellers implies that sellers are able to dominate the market supply and hence the price and hence are able to charge different prices. As it is provided that consumers shop for the lowest price, it indicates that the market is not perfectly competitive as firms are not price takers but price makers. As such, the market is not perfectly competitive.

Option a is incorrect because it is not given whether there are barriers to entry and exit in the airlines industry or not.

Option b is incorrect because it is given that consumers view all airlines as providing basically the same services and hence identical product exists. Such type of market where there are few sellers producing identical product is called an oligopoly without product differentiation.

Option d is Incorrect because it does not meets all the assumptions of perfect competition. The number of sellers in the airlines industry is not large and also firms charge a different price and so are price makers and not price takers. Hence, not a perfectly competitive market.

2)

Answer-option b. Not perfect competition because the product is not identical.

As the colleges vary by location, size and educational quality, it implies that the product offered by each college is differentiated and hence the product is not identical of each college. As such, it is not a perfectly competitive market but a monopolistically competitive market in which there are a large number of sellers each selling somewhat differentiated product.

Option a is incorrect because large number of colleges implies that there is free entry and exit.

Option c is incorrect because it does not meet all the assumptions of perfect competition. As the product is not identical, it is not a perfectly competitive market.

Option d is Incorrect because there are a large number of sellers as there are hundreds of colleges.