1. List and describe the characteristics of a perfectly competitive market.

2. Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run? I can ask you to carefully explain the answer to this question and provide graphs or I can provide graphs as in the perfectly competition homework assignment and ask you to calculate the relevant numbers.

3. Explain how a firm in a competitive market identifies the profit maximizing level of production. When should the firm raise production, and when should the firm lower production?  Be able to illustrate your answer with graphs.

4. Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether this firm will shut down in the short run, or choose to remain in the market. Explain your answer.  Again I can ask you to provide the information or I can provide the graphs as in the PC homework.

5. Under what conditions would a firm choose to shut down? When would it decide to exit the market?  What is the intuition behind your answers?

6. In the late 1990s a study sponsored by the California Agriculture Board found that moderate daily consumption of red wine reduced the incidence of heart disease in laboratory rats. As a result of national press coverage of the report, the demand for red wine increased dramatically. Assume that the wine market satisfies all of the attributes of a competitive market. Further assume that red grapes are the most expensive input into the red wine production process.

a. Use a graph of the market for wine to demonstrate the effect of the report on market equilibrium.

b. Graph the reaction of individual incumbent firms to the increase in market demand. In your graph, identify the firm's revenue and cost structures.

c. What would you predict would happen to long-run industry supply if the price of red grapes increased as wine producers increased their production of red wine. Use a graph to demonstrate the validity of your prediction.

 

7. Explain how a profit-maximizing monopolist chooses its level of output and the price of its goods.  Be able to illustrate your answer with a graph.

8. There has been much discussion of deregulating electricity and natural gas delivery companies in the United States. Using your understanding of monopolies, discuss the likely effect of deregulation on prices in these two industries. Graphically depict these markets to help argue your point.

9. Briefly contrast the difference between equilibrium market outcomes in a monopoly, oligopoly, and perfect competition.

10. Even when allowed to collude, firms in an oligopoly will choose to cheat on their agreements with the rest of the cartel. Why?

11. You must decide whether or not to study abroad next year. How might you use marginal analysis to make your decision?

12. Why is it that two individuals or nations can both gain from trade when they trade things of equal value?

13. Why is productivity so important in an economy and what steps can the government take to increase productivity?

14. Draw a production possibilities frontier representing the economy's possible production of milk and eggs. Now, show what will happen to the frontier or the production point under each of the following circumstances. Use a separate graph to illustrate each situation.

a. The outcome for the economy is efficient, with society choosing approximately equal amounts of milk and eggs.

           b.  A recession causes a significant percentage of the labor force to become  unemployed.

c. Some cows are found to be infected with Mad Cow Disease, and many of the cows must be destroyed.

d. Chickens are infected with a rare disease and egg-laying is reduced.

e. Improvements in animal nutrition raise the general productivity of cows and chickens.

f. The cow and chicken populations increase.

g. The Surgeon General announces that drinking milk prolongs life.

15. What characteristics or requirements must be met for a market to be considered as each of the following?

1. perfectly competitive

2. a monopoly

3. an oligopoly

4. monopolistic competition

16. For each of the following industries, determine whether the market structure is perfect competition, monopolistic competition, oligopoly, or monopoly.

a. the broadcast television networks
b. local telephone service
c. fast food in a city
d. soft drinks
e. municipal water
f. existing (previously issued) U.S. Treasury bonds
g. the automobile industry
h. the textbook industry

17. If an event occurred which changed a market equilibrium, how would an economist go about analyzing the change in equilibrium?

18. Other things being equal, explain the effect each of the following will have on either the demand or supply of corn. Explain also what the effect will be on equilibrium price and quantity.

1. Corn is now considered by doctors to be the most healthy vegetable.
2. There is a decline in the amount of land used to grow corn.
3. Producers expect the price of corn to fall in the future.
4. The price of peas, a substitute for corn, goes up.
5. Corn is a normal good and incomes fall.
6. The price of fertilizer rises.

19. What is elasticity and why do economists use the concept?

20. Consider the following pairs of goods. Which would you expect to have the more elastic demand? Why?