Quiz 8: Public Goods, Common Resources and Merit Goods

MARKET STRUCTURE Define market structure. What factors are considered in determining the market structure of a particular industry?

DEMAND UNDER PERFECT COMPETITION What type of demand curve does a perfectly competitive firm face? Why?

Profit in the Short Run Look back at Exhibit 3, panel (b), in this chapter. Why doesn't the firm choose the output that maximizes average profit (i.e., the output where average cost is the lowest)?

THE SHORT-RUN FIRM SUPPLY CURVE An individual competitive firm's short-run supply curve is the portion of its marginal cost curve that equals and rises above the average variable cost. Explain why.

Case Study: Auction Markets Which of the characteristics of the perfectly competitive market structure are found in FloraHolland Aalsmeer? Reference Case Study: World of Business Auction Markets Flower markets are global. About three-quarters of flowers purchased in the United States are imported. More than half the world's cut flowers move through the auction system in the Netherlands. Five days a week, in a huge building 10 miles outside Amsterdam, some 2,500 buyers gather to participate in FloraHolland Aalsmeer, the largest auction of its kind in the world. Every day over 20 million flowers and plants from thousands of growers around the globe are auctioned off in the world's largest roofed building, spread across the equivalent of 100 football fields. Flowers are grouped and auctioned off by type-long-stemmed roses, tulips, and so on. Hundreds of buyers sit in theater settings with their fingers on buttons. Nearly as many buyers bid online from remote locations. Once the flowers are presented, a clock-like instrument starts ticking off descending prices until a buyer pushes a button. The winning bidder gets to choose how many and which items to take. The clock starts again until another buyer stops it, and so on, until all flowers are sold. Auctions occur rapidly-on average a transaction takes place every 4 seconds. This is an example of a Dutch auction, which starts at a high price and works down. Dutch auctions are more common when selling multiple lots of similar, though not identical, items, such as flowers in Amsterdam, tobacco in Canada, and fish in seaports around the world. Because there is some difference among the products for sale in a given market-for example, some flower lots are in better condition than others-this is not quite perfect competition because perfectly competitive markets sell identical products. More common than the Dutch auction is the English open outcry auction, where bidding starts at a low price and moves up until only one buyer remains. Products sold this way include stocks, bonds, wine, art (think Sotheby's and Christie's), antiques, and livestock. On markets such as the Chicago Board of Trade, prices for commodities such as wheat, gold, and coffee beans are continuously determined in the trading pits using variations of an open outcry auction. The birth of the Internet has breathed new life into auctions. Web sites such as eBay, uBid, and hundreds more hold online auctions for old maps, used computers, wine, airline tickets, antiques, military memorabilia, comic books, paperweights- you name it. The largest online site, eBay, offers over 2,000 categories in a forum that mimics a live auction. Internet auctions allow specialized sellers to reach a world of customers. A listing on eBay, for example, could reach millions of people in more than 100 countries. Computers are taking over markets in other ways. In New York, Chicago, Philadelphia, London, and Frankfurt, hand- waving traders in what seem like mosh pits are being replaced by electronic trading. The Nasdaq was the world's first virtual stock market. There is no Nasdaq trading floor as there is with the New York Stock Exchange. On the French futures exchange, after electronic trading was added as an option to the open-outcry system, electronic trading dominated within a matter of months. Computers reduce the transaction costs of market exchange.

Long-Run Industry Supply Why does the long-run industry supply curve for an increasing-cost industry slope upward? What increases costs in an increasing-cost industry?

PERFECT COMPETITION AND EFFICIENCY Define productive efficiency and allocative efficiency. What conditions must be met to achieve them?

Case Study: Experimental Economics In Professor Vernon Smith's experiment, which "buyers" ended up with a surplus at the market-clearing price of $2? Which "sellers" had a surplus? Which "buyers" or "sellers" did not engage in transactions?

SHORT-RUN PROFIT MAXIMIZATION A perfectly competitive firm has the following fixed and variable costs in the short run. The market price for the firm's product is $150. a. Complete the table. b. At what output rate does the firm maximize profit or minimize loss? c. What is the firm's marginal revenue at each positive rate of output? Its average revenue? d. What can you say about the relationship between marginal revenue and marginal cost for output rates below the profit-maximizing (or loss-minimizing) rate? For output rates above the profit-maximizing (or loss-minimizing) rate?

THE SHORT-RUN FIRM SUPPLY CURVE Use the following data to answer the questions below: a. Calculate the marginal cost and average variable cost for each rate of output. b. How much would the firm produce if it could sell its product for $5? For $7? For $10? c. Explain your answers. d. Assuming that its fixed cost is $3, calculate the firm's economic profit at each output rate determined in part (b).

THE SHORT-RUN FIRM SUPPLY CURVE Each of the following situations could exist for a perfectly competitive firm in the short run. In each case, indicate whether the firm should produce in the short run or shut down in the short run, or whether additional information is needed to determine what it should do in the short run. a. Total cost exceeds total revenue at all output levels. b. Total variable cost exceeds total revenue at all output levels. c. Total revenue exceeds total fixed cost at all output levels. d. Marginal revenue exceeds marginal cost at the current output level. e. Price exceeds average total cost at all output levels. f. Average variable cost exceeds price at all output levels. g. Average total cost exceeds price at all output levels.

PERFECT COMPETITION IN THE LONG RUN Draw the short-and long-run cost curves for a competitive firm in long-run equilibrium. Indicate the long-run equilibrium price and quantity. a. Discuss the firm's short-run response to a reduction in the price of a variable resource. b. Assuming that this is a constant-cost industry, describe the process by which the industry returns to long-run equilibrium following an increase of market demand.

THE LONG-RUN INDUSTRY SUPPLY CURVE A normal good is being produced in a constant-cost, perfectly competitive industry. Initially, each firm is in long-run equilibrium. a. Graphically illustrate and explain the short-run adjustments for the market and the firm to a decrease in consumer incomes. Be sure to discuss any changes in output levels, prices, profits, and the number of firms. b. Next, show on your graph and explain the long-run adjustment to that income change. Be sure to discuss any changes in output levels, prices, profits, and the number of firms.

THE LONG-RUN INDUSTRY SUPPLY CURVE The following graph shows possible long-run market supply curves for a perfectly competitive industry. Determine which supply curve indicates a constant-cost industry and which an increasing-cost industry. a. Explain the difference between a constant-cost industry and an increasing-cost industry. b. Distinguish between the long-run impact of an increase of market demand in a constant-cost industry and the impact in an increasing-cost industry.

WHAT'S SO PERFECT ABOUT PERFECT COMPETITION Use the following data to answer the questions. a. For the product shown, assume that the minimum point of each firm's average variable cost curve is at $2. Construct a demand and supply diagram for the product and indicate the equilibrium price and quantity. b. On the graph, label the area of consumer surplus as f. Label the area of producer surplus as g. c. If the equilibrium price were $2, what would be the amount of producer surplus?

Login to www.cengagebrain.com and access the Global Economic Watch to do this exercise. Global Economic Watch Go to the Global Economic Crisis Resource Center. Select Global Issues in Context. In the Basic Search box at the top of the page, enter the phrase "Green Shoots." On the Results page, go to the Magazines section. Click on the link for the March 13, 2010, article "Green Shoots; Agribusiness in India." As you read the article, concentrate on the fourth paragraph, which describes the traditional market structure for Indian agriculture. How well does the description fi t the four characteristics of perfect competition?

Login to www.cengagebrain.com and access the Global Economic Watch to do this exercise. Global Economic Watch Go to the Global Economic Crisis Resource Center. Select Global Issues in Context. In the Basic Search box at the top of the page, enter the term "perfect competition." Find three or four resources that discuss the economic definition of perfect competition. Writing in your own words, analyze whether the authors support or dispute the idea that perfect competition is realistic and applicable.