APPLICATION QUESTIONS – Week 5
Questionl:
One way of inferring competitive conditions in a market is to consider the lifestyle enjoyed by
employees and owners. In vigorously competitive markets, employee compensation tends to be
meager and profits are apt to be slim. Describe the perfectly competitive market structure and
provide some examples.
Question2:
“A higher minimum wage means some low wage workers will get fired because there will be
less money available for labor costs. An international minimum wage, scaled according to the
working conditions and cost of living in a particular country, would allow local workers to
benefit without significant trade disruption.” Discuss this statement and explain why the demand
curve is apt to be horizontal in the unskilled labor market.
Question3:
“Airline passenger service is a terrible high-fixed cost business featuring herce price
competition. With uniform safety, customers pick the lowest airfare with the most convenient
deparfures. Except for pilots, nobody in the airline business makes any money.” Use the
competitive firm short-run supply curve concept to explain entry and exit in the airline passenger
business. Why are pilots so well paid?
Question4:
Indicate whether each of the following statements is true or false ancl explain why you think so.
A. In long-run equilibrium, every firm in a perfectly competitive industry earns zero profit.
B. Perfect competition exists in a market when all firms are price takers as opposed to price makers.
C. In competitive markets, P > MC at the profit-maximizing output level.
D. Downward-sloping industry demand curves characterize perfectly competitive markets.
E. A firm might show accounting profits in a competitive market but be suffering economic
losses.
Question5:
Dozens of Intemet web sites offer quality auto parts for the replacement market. Their appeal is
obvious. Price-conscious shoppers can often obtain up to 80% discounts from the prices charged
by original equipment manufacturers (OEMs) for such standard items as wiper blades, air filters,
oil hlters, and so on. With a large selection offered by dozens of online merchants, the market for
standard replacement parts is vigorously competitive. Assume that market demand and supply
conditions for windshield wiper blades can be described by the following relations:
QD = 100 – 10P (Market Demand)
QS: i5P (Market Supply)
Where Q is millions of replacement wiper blades and P is price per unit.
QUESTIONS:
A. Determine the market equilibrium price-output combination algebraically.
B. Present your business case to the audience / board members.
Question6:
Mankato Paper, Inc. produces uncoated paper used in a rvide variety of industrial applications.
Ner.vsprint, a major product, is sold in a perfectly competitive market. The follor,ving relation
exists between the firm’s newsprint output and total production costs:
Total Output (tons) Total Cost
475
600
A. Construct a table shorving Mankato’s marginal cost of newsprint production.
B. What is the minimum price necessary for Mankato to supply one ton of newsprint?
C. How much ne.,vsprint would Mankato supply at industry prices of S75 and $ 100 per ton?
