ECO80001 Economics Module 03 (Perfect Competition)

TUTORIAL QUESTIONS FOR MODULE 03

PERFECT COMPETITION & OLIGOPOLY

Note: Questions marked with a [B] are mainly for reviewing “background” and relatively
straightforward material. [E] indicates “extras” questions for deeper learning. The
remaining (unmarked) questions are regarded as “standard”. For assessment, all three
types of questions will be included, but a majority of them will be at the "standard" level.

Multiple-Choice Questions

1. A perfectly competitive market is characterised by which of the following attributes:

(i) a very large number of sellers

(ii) high barriers to entry
(iii) identical products
(iv) firms have the flexibility to price their own product

a) (i) only
b) (i) and (iii)
c) (i), (ii), and (iv)
d) all of the above

2. When you buy a product from a perfectly competitive firm, the price you pay for the
product is

a) equal to the marginal revenue of the firm

b) equal to the average revenue of the firm
c) probably close to the cost of producing and supplying the product
d) all of the above

3. [E] Smallbiz Pty Ltd is a small firm operating in a perfectly competitive market. It
always follows the profit-maximising rule of MR = MC, yet now finds itself at a situation
where Price < Average Cost. This means:

a) it is generating economic losses

b) it may be making some accounting profit
c) it should consider leaving the industry permanently if there are no prospects of price
rising in the future and the costs of closing down are not too high
d) all of the above

4. When many firms in a perfectly competitive market stop operating

a) market supply increases

b) the market supply curve shifts rightward
c) the market supply curve shifts leftward
d) the quantity supplied at every price must increase

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ECO80001 Economics Module 03 (Perfect Competition)

5. In markets characterised by oligopoly

a) collusive agreements will always prevail

b) collective profits are lower under cartel arrangements
c) pursuit of self-interest by profit maximising firms always maximises
collective profits in the market
d) there is tension between cooperation and self interest

Short-Answer Questions

1. Complete the attached table which shows data relating to the operations of Battlers Pty
Ltd, a small firm in a perfectly competitive industry. Using the table, answer the
following questions and fill in the blank spaces with appropriate terms.

a) How can we tell, by looking at only Col. 2 and Col. 4, that Battlers Pty Ltd is a price-
taker?

b) Column 3: total revenue = quantity x …………….

c) Column 4: marginal revenue = change in ………… revenue

d) Column 5: marginal cost = change in ………….. cost

e) Column 7: average cost = ………… cost/quantity

f) Column 9: total profit = ……….. revenue - ………. cost

g) Columns 5 and 7: is AC falling or rising when MC < AC?

when MC > AC?

h) Column 4, 5 and 9: is total profit rising or falling when MR > MC?

when MR < MC ?

i) What is the quantity which maximises profit ?

Compare MR and MC at, and near, this quantity level.

j) Do you expect that potential entrants will want to enter this industry? Why?

Discussion Questions

1. [B] Why would a firm in a perfectly competitive market choose not to set its price above
the going price?

2. Imagine you are the owner of a small banana plantation in Northern Queensland. Further,
suppose a cyclone has just devastated most of the banana plantations in the area, but your
own plantation was spared. Banana supplies from other growing areas in Australia and
from overseas are not in a position to completely fill the gap left by the decrease in output
from Northern Queensland. Using two diagrams and a few brief sentences, illustrate and
describe the effects of this event on the banana market in Australia, and on your own
output and profits. Assume that all this happens early enough in your crop cycle for your
output to be able to respond to the situation.

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ECO80001 Economics Module 03 (Perfect Competition)

3. Two oligopolists, Lachlan and James, are considering whether they should compete
against each other through advertising. On the basis of the following payoff matrix, what
outcome would you predict? Explain your reasoning.

James’s decision

Advertise Don’t advertise

 James gets $2
 $3 billion profit billion profit
Advertise for each
 Lachlan gets $5
billion profit
Lachlan’s
decision
 James gets $5
Don’t billion profit  $4 billion
advertise  Lachlan gets $2 profit for each
billion profit

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ECO80001 Economics Module 03 (Perfect Competition)

Battlers Pty Ltd

(A perfectly competitive firm)

Quantity Revenue ($) Cost ($) Profit ($)

sold Average Total Marginal Marginal Total Average Average Total Marginal
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
…
10 n.a. n.a.
2,000 10 20,000 20,019.25 10.00963 -0.01 -19.25
10 0.25 9.75
2,001 10 20,010 20,019.50 10.00475 0.00 -9.50
10 0.50 9.50
2,002 ….. 20,020 20,020.00 ….. 0.00 0.00
10 ….. 9.00
2,003 10 20,030 20,021.00 9.99551 0.00 9.00
10 1.25 8.75
2,004 10 ….. 20,022.25 9.99114 0.01 17.75
…
10 n.a. n.a.
3,997 10 39,970 35,972.00 8.99975 1.00 3,998.00
10 8.50 1.50
3,998 10 39,980 35,980.50 8.99962 1.00 3,999.50
….. 9.51 …..
3,999 10 39,990 35,990.01 8.99975 1.00 …..
….. ….. …..
4,000 10 ….. 36,000.00 9.00000 1.00 …..
10 10.10 -0.10
4,001 10 40,010 36,010.10 9.00027 1.00 3,999.90
10 10.90 -0.90
4,002 10 40,020 36,021.00 9.00075 1.00 3,999.00
…
10 n.a. n.a.
6,000 10 60,000 58,003.00 ….. 0.33 1,997.00
10 11.50 -1.50
6,001 ….. 60,010 58,014.50 9.66747 0.33 1,995.50

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