Competition and Market Structure: practice questions

6 questions · 12 marks · free, no account · Read the notes first

1. Question 1Multiple choice · 1 mark

   Which of the following is a feature of a perfectly competitive market?

   A

   Each firm is a price searcher.

   B

   Products are homogeneous and each firm is a price taker.

   C

   There are high barriers to entry.

   D

   Firms compete mainly by advertising.

2. Question 2Multiple choice · 1 mark

   Two large chains have most of the market share in Hong Kong's supermarket industry and closely watch each other's prices. This market is best described as

   A

   perfect competition.

   B

   monopolistic competition.

   C

   oligopoly.

   D

   monopoly.

3. Question 3Multiple choice · 1 mark

   Which of the following is NOT a source of monopoly power?

   A

   A patent

   B

   A government franchise

   C

   Economies of scale with a high set-up cost

   D

   A large number of buyers

4. Question 4Multiple choice · 1 mark

   Several driving schools agree to charge the same course fees. Which rule of the Competition Ordinance may they be breaching?

   A

   The First Conduct Rule

   B

   The Second Conduct Rule

   C

   The Merger Rule

   D

   None, because firms may set prices freely

5. Question 54 marks

   There are hundreds of hair salons in Hong Kong. Each offers different styles, locations and services. Explain TWO features of the market structure of the hair salon industry.

   Show worked solution

   The market is monopolistic competition. Any TWO features (2 marks each):

   • Many sellers, none dominant: with hundreds of salons, no single salon has a large market share.
   • Heterogeneous products: each salon differs in style, location and service, so each is a price searcher and can raise its price a little without losing all its customers.
   • Easy entry: setting up a salon needs little capital, so new salons can enter.
   • Non-price competition: salons compete through advertising, membership cards and service quality.
6. Question 64 marks

   Explain TWO possible sources of the monopoly power of a railway operator.

   Show worked solution

   Any TWO (2 marks each):

   • Natural monopoly: building a railway needs a very high set-up cost, and with economies of scale one operator can serve the market at a lower average cost; demand is not large enough to support a second railway on the same route.
   • Government franchise: the government grants the operator the exclusive right to run the railway, so rivals cannot legally enter.
   • Control of essential inputs: the operator owns the tracks and stations that a rival would need.