Question

When conducting basic market analysis, we often assume that we have a perfectly competitive market. This setting requires a number of conditions. Which of the following is not a required condition?

• A. There are many buyers.

• B. Market participants (buyers and sellers) know what other participants are doing.

• C. There are many sellers.

• D. There is no barrier for buyers and sellers to enter or exit the market.

• E. Some sellers are competitive enough to become dominant players in the market.

Ch2

The following is the labor productivity table for firms A and B, given that they have a fixed number of labor hours. Please complete the opportunity cost table and identify absolute advantages and comparative advantages.

Productivity

	Product X	Product Y
Firm A	40 units per hour	50 units per hour
Firm B	60 units per hour	100 units per hour

In terms of producing X, which firm has the absolute advantage?   (Enter 1 for firm A or 2 for firm B)

In terms of producing Y, which firm has the absolute advantage?   (Enter 1 for firm A or 2 for firm B)

Opportunity Cost Table

	Product X	Product Y
Firm A	units of Y per X	units of X per Y
Firm B	units of Y per X	units of X per Y

In terms of producing X, which firm has the comparative advantage?   (Enter 1 for firm A or 2 for firm B)

In terms of producing Y, which firm has the comparative advantage?   (Enter 1 for firm A or 2 for firm B)

Answer 1

From the given information, the statement "some sellers are competitive enough to ...players in the market" is not the assumption of the perfect competitive market. The correct assumption is, in the perfect competitive market, all the sellers have strong competition. Thus, the option E is the answer. 2. Firm A Firm B Product X 40 units per hour 60 units per hour Product Y 50 units per hour 100 units per hour From the above information, we can say that, in terms of producing X, firm B has an absolute advantage, because the labor productivity of firm B (60 units per hour) is greater than firm A (40 units per hour). In terms of producing Y, firm B has an absolute advantage, because the labor productivity of firm B (100 units per hour) is greater than firm A (50 units per hour). Calculation of opportunity cost:

Product X Product Y 50/40 = 1.25 units of Y per 40/50 = 0.8 units of Xper Y Firm A Firm B 100/60= 1.67 units of Y per 60/100= 0.6 units of X per In terms of producing X, firm A has comparative advantage, because it has lower opportunity cost of 1.25 than firm B. In terms of producing Y, firm B has comparative advantage, because firm B has lower opportunity cost of 0.6 than firm A.