Reference no: EM132323599

Question 1 a - c

Bookstores in a large city would seem to be an example of a competitive market, since there are many sellers operating relatively small shops, each seller takes the price of a particular book as given, and the products (books, magazines, etc.) are very similar between different shops.

Question a

How could you argue that the bookstore market is not competitive?

Select one:

a. Most bookstores only serve clients who live or work relatively close by. A bookstore on one side of town usually does not attract clients who live or work many miles away on the other side of town. Thus, bookstores tend to only compete with the relatively few other bookstores that are nearby.

b. Each bookstore sells a very differentiated product to its customers, since it is rare that two customers are shopping for the exact same set of products (perfect substitute).

c. Since bookstores only sell physical or tangible items to customers, the prices charged are not constrained by market forces and can be unusually high or low.

d. Many bookstores may be locally-owned, but are franchises of a single major corporation. Thus, the market is not competitive since it is ultimately only served by one supplier.

Question b

Is it possible that each bookstore could face a demand curve that is not perfectly elastic?

Select one:

a. Yes; demand is only perfectly elastic if the demand curve is upward-sloping, and bookstore demand is downward-sloping.

b. Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since customers will not stop at every bookstore in the city to find the cheapest price), then they will not face perfectly elastic demand.

c. No; since clients are not willing to accept price changes for their books or magazines from one month to the next (e.g., $15 book this month, $20 book next month, etc.), the price will remain constant in the long run and thus demand is perfectly elastic.

d. No; each bookstore in a large city is indistinguishable from the others (i.e., they are perfect substitutes), and so demand for any individual bookstore is perfectly elastic.

Question c

How profitable do you expect bookstores to be in the long run?

Select one:

a. Even with a small amount of market power due to attracting only local customers, it is still relatively easy to enter and exit the bookstore industry. Long-run profits will likely be driven down close to zero.

b. Since they are usually very small, most bookstores will be unable to compete with larger firms with higher fixed and variable costs. Bookstores should expect losses in the long run.

c. Improvements in inventory technology, and the difficulty of new entrepreneurs entering this market, will guarantee above-normal profits for bookstores for the next few decades.

d. Bookstores have the ability to set their own price above the market equilibrium price for a considerable length of time given their small size and the sheer number of other bookstores. Most individual bookstores will enjoy positive economic profit in the long run.