Answers to Week 6 Practice Questions

Multiple Choice

1) b 
2) c
3) a
4) d
5) c
6) b
7) d
8) e
9) b
10) c
11) b
12) b

Challenge Questions

 
1.
	A) II
	B) IV
	C) II
	D) III
	E) I
	F) III

2.  

	A) This may fit the assumptions the best of all of them.  Wheat is
homogeneous (I can't distinguish my wheat from other's wheat very well, if
at all).  There are many, many producers of wheat (Have you ever driven
across Kansas before?). And it is relatively cheap to enter (You could
grow wheat in a backyard and nature provides most of the inputs for free -
water and sun). However, the most efficient producers in agriculture 
seem to be the large corporate farmers because of economies of
scale.  To enter at this scale of operation is very expensive, not
free.

	B) Products are not homogeneous.  Remember the Pepsi Challenge?
But even if you can't distinguish between Coke and Pepsi, there are
zillions of other brands and flavors.  Just check out your local 7-11.
Also, the soft drink industry is dominated by a few big firms, not many
local ones.  Entry is not too expensive, but not free either.

	C) Products are homogeneous which is important.  I'm not sure that
there are many firms though.  Certainly entry and exit is not too
expensive either.  So this market may not be too far away from perfectly
competitive conditions. EXTRA CREDIT FOR ANYONE THAT WANTS TO RESEARCH FOR
ME HOW MANY DIFFERENT BRANDS THERE ARE OR (BETTER) HOW MANY FIRMS IN THE
U.S. PRODUCE TOOTHPICKS.


	D) Like soft drinks, products are definitely not homogeneous and
the market is dominated by a couple major firms.  Entry and exit costs are
probably not too expensive relative to some other industries, but not
close to free either.


	E) Product is homogeneous, and there are potentially many sellers
of electricity.  However, the entry costs may be very high and there is a
problem of getting the electricity to the customer over common electric
lines.  This market is a very special one which we will talk about after
the second midterm.


3. Technological improvement increases productivity of variable inputs,
causing marginal and average cost curves to shift downward.  The minimium
possible average cost of production likewise falls.  As marginal costs
fall relative to marginal revenue, the firm has an incentive to increase
production in order to maximize short-run profits.  But short-run profits
induce entry into the industry, shifting the market supply curve rightward
and reducing the market price.  In the long run, the market price is likely 
to fall below the original market price because price will fall to equal
the minimum average cost, which has fallen below its original level due
to the technological improvement.