Chapter 5
Essay questions
- “Perfect competition does not exist in reality and so the model does not offer anything of economic use.” - Discuss.
- Evaluate how close to the perfect competition model is the tramp shipping market of the European Union.
Exercises
1. A perfectly competitive market, with eight identical firms within it, is characterised by the following conditions:
Qd = 100 - 2P
Qs = 10 + 3P
(a) What is the market price?
(b) If the producers each supply an equal share to the market, how much do they each supply?
(c) What is the average cost for each firm in equilibrium?
(d) Calculate the level of consumer and producer welfare within the market.
Due to an increase in incomes, demand increases so that it now has the following equation:
Qd = 140 - 2P
(e) What is the effect of this increase in demand on the market price in the short-run?
(f) How much abnormal profit do each of the firms make in the short-run?
(g) As there are no barriers to entry or exit in perfect competition, the market soon adjusts and moves to the long-run equilibrium. What is the price in this new equilibrium?
(h) Assuming that the firms continue to produce the output at which they are productively efficient, how many firms will there now be in the market?
