Question

 4.

 Market power arises from:

 O the entry of new firms to an industry in which the firms are earning large producer surplus.

 O barriers to entry.

 O diseconomies of scale.

 O diminishing marginal returns.

5.

 Which of the following statements is (are) TRUE?

 I. Panel a illustrates conistant returns to scale. II. Panel b illustrates decreasing returns to scale. III. Panel a illustrates increasing returns to scale IV. Panel b illustrates constant returns to scale.

 O I and IV

 O Il and III

 O Ill and IV

 OI and III

Answer 1

4. The correct option would be

• barriers to entry.

The market power of firms occurs where there are barriers to entry. In a perfect competition, the assumption is that there are no barriers to entry, and due to that reason the firms do not have any market power. But, in monopoly, the assumption is that there are barriers to entry for other firms, and due to that reason, the firm have all the market power. In monopolistic and oligopoly market, there are various degrees of barriers to entry, which provides the different levels of market power to the firms.

5. The correct option would be

• III and IV

The graph is as below.

In panel-a, doubling the inputs (L from 10 to 20 and K from 4 to 8) increased the output by more than 2 times (Q from 20 to 50), meaning that the technology is increasing returns to scale (the increase in inputs by a>1 times would increase the output by more than a times).

In panel-b, doubling the inputs (L from 8 to 16 and K from 6 to 12) increased the output by exactly 2 times (Q from 35 to 70), meaning that the technology is constant returns to scale (the increase in inputs by a>1 times would increase the output exactly by a times).