CHAPTER 4: BUSINESS ENVIRONMENT OF THE FIRM

Activity 46

Assume perfect competition. With which of the following descriptions do you agree or
disagree with? (Indicate you answer with an X).

Descriptions Agree Disagree

Products can be homogeneous or differentiated.
Individual firms are price takers.
Perfect competition is a market structure in which there are
many buyers but few suppliers.
Under perfect competition it is assumed that buyers and
sellers have perfect information of market conditions.
For perfect competition to exist, the product must be
homogeneous.
The individual demand curve of the firm is perfect inelastic.
Equilibrium output is such that MR=MC.
Economic profits in the short run is only possible if
P>minimum of ATC and the equilibrium condition is applied.
The rising part of MC curve starting at the minimum point of
the AVC curve represents the short-run supply curve of the
individual firm.
Only normal profits are possible in the long run.

Activity 47

This activity deals with the derivation of the long-run supply curve for the perfect
competitive industry. Indicate which of a constant cost industry, increasing cost
industry or decreasing cost industry are described by the following.

Description Answer
Long-run supply curve is perfect elastic.
In order to produce more in the long run this kind of
cost industry requires higher prices.
In order to produce more in the long run this kind of
cost industry can sell at a lower price.
The slope of the long-run supply curve is negative-
 sloping.
The slope of the long-run supply curve is positive-
sloping.

Activity 48

Firm A operates in a perfectly competitive market. The current market price is R10
per unit and the firm’s total cost is TC = 8 + 4Q + Q2.

Calculate the following.

Task Answer
Profit-maximising output.
Total revenue of the firm.
Total cost of the firm.
Total profit/loss position.

Activity 49

Assume monopoly formation. With which of the following descriptions do you agree
or disagree with? (Indicate you answer with an X).

Descriptions Agree Disagree

Monopoly is a market structure in which there is only one
buyer and many sellers.
Monopoly is a market structure in which there are many
buyers and only one seller.
The monopolist faces a downward-sloping demand curve.
One of the characteristics of monopoly is absolute barrier to
entry.
A monopoly can realise economic profit in the short run but
only normal profits in the long run.
The equilibrium condition for the monopolist is such that P =
MC.
A monopolist is in equilibrium where MC = MR and earns
economic profit if average revenue is greater than average
cost.
When compared to a perfect competitive industry a
monopolist produces the greater output.
When compared to a perfect competitive industry a
monopolist charges the higher price.
When the monopolist applies the practise of price
discrimination it would charge a higher price to the relative
inelastic market segment.

Activity 50

Assume monopoly competition. With which of the following descriptions do you

agree or disagree with? (Indicate you answer with an X).
 Descriptions Agree Disagree
For monopolistic competition to exist there must be many
buyers and many sellers.
Monopolistic competition is a market structure where there
are many buyers and one supplier.
Monopolistic competition is a market structure where there
are many suppliers supplying a homogeneous product.
Monopolistic competition is a market structure in which a
heterogeneous or differentiated product is supplied.
Under monopolistic competition, suppliers have an incentive
to advertise their products.
A monopolistically competitive firm can earn only normal
profit in the short run.

Activity 51

Assume oligopoly formation. With which of the following descriptions do you agree or
disagree with? (Indicate you answer with an X).

Descriptions Agree Disagree

Oligopoly is defined as a market structure with a large
number of sellers who collectively dominate the market.
Oligopoly is a market structure where there are many buyers
and only a few firms, which supply either a differentiated or
a homogeneous product.
Oligopoly is characterised by interdependence and
uncertainty, since actions of one firm may lead to reactions
by other firms in that industry and it is impossible for any
firm to know exactly how its competitors will react.
Oligopolies are highly unusual in the South African
economy.
Pure oligopoly concerns only homogeneous products.
Barriers to entry play an important role in the establishment
of an oligopolistic market structure.
The Sweezy model explains the non-rigidity of prices.
In the Sweezy model the upper segment of the kinked
demand curve is relatively elastic.
Under oligopoly, collusion such as cartel formation becomes
possible.

Activity 52

Assume the following figure that denotes a dominant price-leadership model.

Reconcile the number in the figure with the correct description in the table below.

Description Answer
Market demand curve.
Demand curve of dominant firm.
Marginal revenue curve of dominant price leader.
Combined supply curve of the other firms in the market.
Output of dominant price leader.
Combined output of smaller firms.
Market output.

Activity 53

With which of the following descriptions do you agree or disagree with? (Indicate you
answer with an X).

(1) Assume that Eco cc is operating in a perfect competitive market.

Descriptions Agree Disagree
Eco is producing a homogeneous product.
Eco will make a normal profit if its total revenue is greater
than its total economic cost.
It is possible for Eco to realize an accounting profit in the
short run, even if it makes an economic loss.
The demand curve facing Eco is perfectly elastic.

(2) The following question deals with the long-run supply curve in a perfect
competitive market where the slope of said curve depends on the returns to scale
that is prevalent in the industry.
Descriptions Agree Disagree
In the case of decreasing returns to scale the long-run
supply curve has a positive slope.
In the case of increasing returns to scale the long-run
supply curve has a negative slope.
For the increasing returns to scale industry the relative
change in demand exceeds the relative change in
supply.
(3) Assume that Zipco Pty (Ltd) has 100% of the market share in a particular
product.
Agree Disagree
Descriptions
The demand curve of Zipco is not perfectly elastic.
Zipco will tend to produce less than under perfect
competitive conditions.
Zipco is more efficient in the utilization of production
factors compared to a perfect competitive market.

Activity 54

Answer the following questions.

Questions Answer
Is the demand curve for a perfect competitive firm relative
elastic, relative inelastic, perfect elastic or perfect
inelastic?
What is the equilibrium condition for a perfect competitive
firm in the short run?
Assume that the market price is between the minimum of
the ATC curve and the AVC curve. Will the perfect
competitive firm make an economic profit, a normal profit
or an economic loss?
What is the slope of the long-run supply curve for an
increasing cost industry (indicate positive, negative, zero
or infinity)?
What is the slope of the long-run supply curve for a
decreasing cost industry (indicate positive, negative, zero
or infinity)?
What is the equilibrium condition for a pure monopolist?
Which one of a perfect competitive market or a pure
monopolist will charge a higher price?
Assume price discrimination. For which market segment
will the higher price be charged (state elastic or inelastic)?
What kind of profit can a monopolistic competitive firm
generate in the long run? (State only economic profit, only
economic loss, either economic profit or an economic loss
or only normal profit).
What kind of oligopolistic market structure deals with
homogeneous products?
What kind of price structure is explained by the Sweezy
model? (Simply state variable prices, rigid prices or fixed
prices)?
From which curve is the price derived in the case of a
dominant price-leader? (State market demand or
individual demand of price-leader).

Activity 55
This activity deals with the efficiency implications of monopoly formation.

Consider the figure above and answer the following questions.

Question Answer
What is the loss of consumer surplus? (Indicate the
areas).
Will the loss of consumer surplus increase or decrease if
the demand becomes more price sensitive?
What is the total efficiency loss? (Indicate the area(s)).