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Homework-III
School of LHSB Department of Management
Name of the faculty member P. Kansra
Course No: ECO151 Course Title: Micro Economc Theory
Class: BBA (Hons.)&B.Com(Hons.) Semester I Batch : 2010
Max. Marks : 10 Date of Allotment_18/10/10 Date of Submission_30/10/10
S.No Roll No Objectives of Academic Topic Organization Evaluation Details
Activity
All students All Topics Students will attempt
Applications of different
all the questions and
market forms i.e. Perfect
competition, Monopoly, submit the same.
Monopolistic competition
and Oligopoly. Subsequently a test,

where random

questions will asked

and student will be

judged on the basis

of test. The test will

be of 5 marks and 5

marks for homework

submission. Only

those who submit the

assignment will be

eligible for test only.

Assignments will be

submitted only

through UMS.

Date: Signature of Faculty member

ECO151: Micro Economic Theory


Homework-III
Note: No assignment shall be catered after the date of submission.
1 There are two fast food outlets in the city of Bhopal. Experience tells that they have
tried to engage in price war to win more customers but have not gained substantially
in terms of profits. Can these outlets collude to increase profit?

Ans- In a perfect competition as there are more than one firm each firm takes a share of the
profit that the industry makes. In this case as the two fast food outlets are in perfect
competition both of them want more customer so they are reducing there price but
that is not fetching them much profit as the price is low and they are just making
supernormal profit. The two firms are continuing because it is in the long run the
margin is greater.
If the two firms merge they will be together and the competition will decrease, they
can now fix their own price and that will be higher and the customers will be left with
no options but to come to them and they can earn profit.ty
2 You must read about ‘Fan Makers Association’ or ‘Auto Riksha Union’ or FICCI
.What kind of services does each one of them provide? Do they charge a price for
their services? What kind of market do they represent? Do you understand their
market strategy and tactics?
3 A particular car manufacturer regards his business as highly competitive, as he is
keenly aware of his rivalry with the other car manufacturer. Like others, he
undertakes vigorous advertising campaigns and seeks to convince potential buyers of
the superior quality and better style of his automobiles and reacts very quickly to
claims of superiority by rivals. Is this what meant by perfect competition from an
economic point of view? Explain.

Ans- Perfect competition means that there are many firms in the industry and many buyers
and the price of the commodities is determined by the industry and all the firms has to
oblige that. The car manufacture is in a perfect competition market where there are
many such similar firms producing cars and he has to sell the cars in the price
determined by the industry to maximize his profit he has to reduce is average cost and
he is having a differentiation strategy to attract customers. Through this strategy the
firm can have more customers than its competitors and can earn more profits in
comparison to the other firms.
4 Is monopoly always socially undesirable? Take any real life example of monopoly in
India and build your logic in favour of or against this?

Ans- Yes monopoly is socially undesirable because in monopoly there is one firm and
many consumers and the firm is the price maker there is no substitute for the
commodities produced by the firm and the consumers will have to be fixed with one
firm only. Now the firm can fix any price for its goods and the consumer will have to
pay that as there are no substitutes and the price an be very high and the firm earns
supernormal profit.
Indian railways is an example of monopoly and the ticket fares are decided by the
railway only and the people ha to abide by that fare only they will have no other
option and the price of ticket for some ca be more than affordable.
5 Compare the market environment of monopolistic competition with that of perfect
competition, quoting real world business examples
In monopolistic product are heterogeneous, and the firm is a price maker as seller
Ans- makes the product unique by some difentiation and has control over small section of
market price.
Eg- Retail store(detergent)
There are many firms which selling detergents by name and quality differentiation at
different prices. so they can decide the price of products and can sell at desired price
but the price is decided by where he get maximum sales + maximum profit and
control over small section of market.
And in perfect competition the goods are homogeneous and firm is a price taker and
the industry is a price maker so the firm has no control over market price.
For example:- agriculture commodities that is serial market in this the seller have to
take the same price which is decided by the industry and have can’t take mote price
than the decide one from the consumer.

6 As a consumer, would you favour advertising in a monopolistically competitive


industry? Would your answer be different if you are a manager of a firm in this
industry?
Ans- Yes, as a consumer I will favour as I will came to know about the different and new
products their prices and the quality and then I will have the full knowledge about
goods and I can purchase the best 1.
And when I am a manager of that firm and I will favour the advertisement as more
and more consumer will know about my goods and the demand of the goods will
increase
7 Which of the following can be identified to be in a monopolistic competition and
monopoly? Defend your answer with suitable examples.
i. Maruti Suzuki

ii. Microsoft

iii. Indian Railways

iv. Orkut (social networking website)

8 What are the economic entry barriers which create monopoly? Illustrate with
examples from Indian economy

Ans- The economic barriers which create monopoly are-


REDUCE COST- the fim which is present in the monopoly market will reduce its
cost to such an extent that new entrants cannot afford to sell their products in that low
price as the initial firm can afford loss for sometimes.

COPYRIGHT OR PATENT- the firm can issue copyright or patent for its product
that no one can copy its product and sell in the market.

HIGH SWITCHING COST-the firm can have high switching cost associated with its
product that the consumers never think of moving into products of other company.

9 Which between monopolistic competition and monopoly is economically more


inefficient in allocation of resources? Support your answer with justification?
10 Which of the following companies can be identified to be a monopoly? Defend your
answer with justification:
i. Apple Inc. (ipods)

ii. Google (Internet search engine)

iii. Reliance India

iv. Orkut (Social networking website)

Ans-