MASTER OF BUSINESS ADMINISTRATION (MBA)

FACULTY OF COMMERCE AND MANAGEMENT STUDIES

UNIVERSITY OF KELANIYA
2017/2018 (12th Batch)

Review Questions – Market Structures

Perfect Competition
1) What is meant by a competitive firm?
2) Under what conditions will a firm shut down temporarily? Explain.
3) Under what conditions will a firm exit market? Explain.
4) An industry currently has 100 firms all of which have fixed cost of Rs.160 and
average variable cost of as follows:
Quantity Average Variable Cost
1 Rs.10
2 20
3 30
4 40
5 50
6 60

a) Compute marginal cost and average total cost.

b) The price is currency Rs.100. What is the total quantity supplied in the market?
c) As this market makes the transition to its long run equilibrium, will the price rise or
fall? Will the quantity demanded raise or fall? Will the quantity supplied by each
firm rise or fall?
d) Graph the long run supply curve for this market.

Monopoly
1) Give an example of a government created monopoly. Is creating this monopoly
necessarily bad public policy? Explain.
2) Draw the demand, marginal revenue, and marginal cost curves for a monopolist.
Show the profit maximizing level of output. Show the profit maximizing price.
3) In your diagram from the previous question, show the level of output that maximizes
total surplus. Show the deadweight loss from the monopoly. Explain your answer.
4) Give two examples of price discrimination. In each case explain why the monopolist
chooses to follow this business strategy.
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 5) The ABC company has a monopoly in the sale of a type of medicine and faces the
following demand schedule:
Price Quantity Demanded

Rs.40 0
35 10000
30 20000
25 30000
20 40000
15 50000
10 60000
5 70000
0 80000

a) The firm has fixed costs of Rs.60,000. The marginal cost of each unit of medicine is
constant at Rs.15.
b) Compute total revenue, total cost, and profit at each quantity. What quantity would a
profit maximizing manufacturer choose? What price would it charge?
c) Compute marginal revenue. How does marginal revenue compare to the price?
Explain.
d) Graph marginal revenue, marginal cost and demand curves. At what quantity do the
marginal revenue and marginal cost curves intersect? What does this signify?
e) In your graph, shade in the deadweight loss. Explain in words what this means.

Monopolistic Competition

1) What are the characteristics of a monopolistically competitive market? What happens

to the equilibrium price and quantity in such a market if one firm introduces a new,
improved product?
2) Draw a diagram depicting a firm in a monopolistically competitive market that is
making profits. Explain what happens to this firm as new firms enter the industry.
3) How advertising reduce economic well-being? How it increase economic well-being?
4) Explain two benefits that might arise from the existence of brand names.

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 5) Using the given diagram answer the following questions. (Answers may approximate)

a) What is the profit maximizing quantity and price? How much the economic profit or
loss?
b) Is there any deadweight loss?
c) Explain in a few words what is happening in the graph above.
d) Explain briefly how the firm achieves long-run equilibrium in a monopolistically
competitive market?

Oligopoly
1) Among monopoly, oligopoly, monopolistic competition, and perfect competition, how
would you classify the markets for each of the following drinks?
a) Tap water
b) Bottled water
c) Cola
d) Beer
2) A large share of the world supply of diamonds comes from Russia and South Africa.
Suppose that the marginal cost of mining diamonds is constant at Rs.1,000 per
diamond and the demand for diamonds is described by the following schedule:

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 Price Quantity
Rs. 8,000 5,000 diamonds
7,000 6,000
6,000 7,000
5,000 8,000
4,000 9,000
3,000 10,000
2,000 11,000
1,000 12,000

a) If there were many suppliers of diamonds, what would be the price and quantity?
b) If there were only one supplier of diamonds, what would be the price and
quantity?
c) If Russia and South Africa formed a cartel, what would be the price and quantity?
If the countries split the market evenly, what would be South Africa’s production
and profit? What would happen to South Africa’s profit if it increased its
production by Rs.1,000 while Russia stuck to the cartel agreement?
d) Use your answer to part (c) to explain why cartel agreements are often not
successful.

3) Suppose that local gas market is comprised of two firms: Laugfs Holdings PLC and
Litro Gas Lanka Ltd. Each firm is trying to decide whether to undertake a new
advertising campaign. The advertising will gain new customers and increase profits
only if the other firm does not advertise. Thus, if Laugfs advertise, they will earn high
profits if Litro doesn’t advertise, but low profits if Litro also advertises. Likewise if
Litro advertises, they will earn high profits if Laugfs does not advertise, but low profits
if Laugfs also advertises. If neither firm advertises, they keep the medium profits they
are currently earning.
a) Draw the decision box for this game.
b) Does either player in this game has a dominant strategy?
c) What is the Nash equilibrium in this game? Explain.
d) Is there an outcome that would be better than the Nash equilibrium for both firms?
e) How could it be achieved?

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