1. Market structures can be categorized according to two dimensions: How many producers there are and the extent to which products are differentiated. Explain how this categorization leads to four different market structures: 1) perfect competition; 2)monopoly; 3) oligopoly; and 4) monopolistic competition.
2. Seafront properties along the promenade at Brighton have inelastic supply, and cars have an elastic supply. Suppose that a rise in population doubles the demand for both products (that is, the quantity demanded at each price is twice what it was).
(a) What happens to the equilibrium price and quantity in each market?
Illustrate using a diagram.
(b) Which product experiences a larger change in price?
(c) Which product experiences a larger change in quantity?
(d) What happens to total consumer spending on each product?
3. If a market is monopolistic, the monopolist can choose at what price level to offer its product on the market.
(a) Explain why a monopolist will choose to sell at a price that is higher than its marginal cost of production.
(b) Given that a monopolist sells at a price higher than marginal cost, explain why this does not necessarily mean that a monopolist will always make positive total profits.