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1. Compare and contrast the conditions for a perfectly competitive market, monopolistic market, monopolistic competitive market and an oligopolistic market? How would you explain the main differences among these market structures? Identify which market structure various industries compete in and why you think so.
2. In your own words, explain the difference between economic and accounting profits. How could you graphically illustrate economic profits made by a perfectly competitive firm; monopolist; and firm competing in a monopolistic competitive market? What conditions exist when economic profits are maximized?
3. What are some real-life examples of monopolistically competitive, oligopoly, and monopoly markets? How do market prices differ between perfectly and imperfectly competitive markets? Will a monopoly always produce at a profit-maximizing level of output? Explain your answer.
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This solutions explores the differences among perfectly competitive market, monopolistic market, monopolistic competitive market and an oligopolistic market.
1. The market structures are defined based on various measures. It will be beneficial to mention the characterization of each type of market structure that illustrates the differences too. Starting with perfectly competitive markets, they are characterized by the following:
- Many firms
- Identical products
- No barriers to entry or exit
- Perfect information
- No firm is very big
- Price Takers
- No economic profit
Examples include food grains, hosiery, fruits and vegetables, and other low cost industries.
A monopoly is the other extreme of the market, and is characterized by the following:
- Single firm, or one dominant firm
- No close substitutes
- Barriers to entry and/or exit
- Positive economic profit
- Monopolist decides the market price
Note that in the purest sense that we use the word monopoly it means that there is just one firm, but the Department of Justice, and regulators across the world, based on certain measures may classify a company as a monopolist even if it is not the only firm operating. Examples here include utility companies, local transit companies, major defence producers.
A oligopolistic industry ...
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