Question

Determine whether each of the following business is in an industry that is purely competitive, monopolistically competitive, oligopolistic or monopolistic.

1.You collect shellfish from the mudbanks of the N. Shore and airmail them all over the world. Massachusetts allows you and a handful of other companies to do the same. This industry is __

Are short-run profits possible? Are long-run profits possible?

2.You buy a gas station on Route 1 and the process was pretty easy. This industry is __

Are short-run profits possible? Are long-run profits possible?

3.The Tobin bridge enables Route 1 drivers direct access to the TD Garden and I-93. Taking Rt. 60 to 1A or driving into Middlesex County to connect with 1-93 are hardly alternatives. This industry is __

Are short-run profits possible? Are long-run profits possible?

4.You have a small office supplies website and mail paper clips, staples, pencils and pens everyday. This industry is __ Are short-run profits possible? Are long-run profits possible?

Rubric: SR profit 3@, LR profit 5@, market structure 17@

Answer 1

Question 1

It has been stated that only few firms are allowed to undertake the collection of shellfish from the mud banks of N shore and sell them worldwide.

Thus, there exist few firms in the market with substantial entry barriers.

A market with few firms and substantial entry barriers is a oligopoly market.

So,

This industry is oligopolistic.

In oligopolistic industry, both short-run and long-run profits are possible due to considerable entry barriers.

Thus,

In this industry, both short-run and long-run profits are possible.

Question 2

It has been stated that any body can easily buy a gas station on Route 1. So, there is no entry barrier in this industry.

Location of gas station, advertising with respect to branding of gasoline products etc. provides station owners to create product differentiation and some power to charge price for gasoline.

A market with differentiated product, some market power to decide, and no entry barriers is a monopolistically competitive market.

So,

This industry is monopolistically competitive.

In monopolistically competitive industry, short-run profits are possible but due to free entry, there is no long-run profits.

Thus,

In this industry, short-run profits are possible but long-run profits are not possible.

Question 3

There is no alternative to Tobin bridge for Route 1 drivers to get direct access to the TD Garden and I-93.

When a seller sells a unique good with no perfect substitutes and there are such strong barriers to entry that no other firm can enter the market, such market is said to be monopoly.

So,

This industry is monopoly.

In monopoly, both short-run and long-run profits are possible.

Thus,

In this industry, short-run as well as long-run profits are possible.

Question 4

The small office supplies website mails paper clips, staples, pencils ,and pens everyday.

There would be hundreds of website like this and product of each would be perfect substitute of each other.

A market with large number of firms and each firm sells homogeneous product with no entry barriers is a purely competitive market.

So,

This industry is purely competitive.

In purely competitive industry, short-run profits are possible but due to free entry, there is no long-run profits.

Thus,

In this industry, short-run profits are possible but long-run profits are not possible.