Market structures: from perfect competition to monopoly

Grade 12 Social Studies Worksheet - Challenge Me

Circle the best answer.

1. Read this first

   Use this

   Cards A to C on a new drug (all made up for practice). Card A, "The drug's economics (made up)". Written for this sheet. Summary in our words, not a quotation: developing the drug costs $600 million, paid before any sale. Each dose costs $2 to make. Under a patent, the firm charges $50 and sells 4 million doses a year. The patent lasts 10 years. After the patent, rivals enter and the price falls to $4. Card B, "The developer's point (made up)". Written for this sheet. Summary in our words, not a quotation: only 1 in 3 projects like this one succeeds, so each success must earn back the cost of three projects, $1.8 billion. Card C, "A critic (made up)". Written for this sheet. Summary in our words, not a quotation: a critic says a 5-year patent would be enough, because the drug earns $192 million of profit a year.

2. 1.

   Pia uses card A. What does the firm earn in profit from the patent in a year, and what does it show?

   • $200 million a year, the revenue from 4 million doses at $50, which shows the firm's yearly profit
   • $192 million a year (4 million doses times $48), or $1.92 billion over 10 years
   • $48 a year, the profit on one dose, which shows that the firm earns very little
   • $192 million a year, but the firm should count the $600 million as lost each year it is not recovered
3. 2.

   A critic says the patent costs buyers too much. What evidence would most challenge the case for a patent, in Ren's view?

   • Whether the drug would have been developed without the patent, since then its cost to buyers buys nothing
   • Whether 4 million doses a year is a high number, since buyers might want fewer
   • What the price of the drug will be after the patent, since card A says it falls to $4
   • Whether the firm made $192 million of profit a year, which card C already gives

4. Use this

   Cards A to C on a merger (card A is a summary of the Justice Department's guidelines; cards B and C are made up). Card A, "How the guidelines measure concentration". Source: U.S. Department of Justice and Federal Trade Commission, Merger Guidelines (2023), Guideline 1 (justice.gov/atr/merger-guidelines), read Nov 14, 2026. Summary in our words, not a quotation: the HHI is the sum of the squares of the market shares, with shares in percent. A market with an HHI over 1,800 is highly concentrated. A merger is presumed harmful if the market is highly concentrated afterward and the HHI rises by more than 100, or if the merged firm's share is over 30 percent and the HHI rises by more than 100. The presumption can be rebutted with evidence. Card B, "Market S (made up)". Written for this sheet. Summary in our words, not a quotation: four firms have shares of 35, 30, 20 and 15 percent. The firms with 20 and 15 percent plan to merge. Card C, "The firms' case (made up)". Written for this sheet. Summary in our words, not a quotation: the two firms say the merger will save $12 million a year in costs. They also say entry is easy: in the last ten years two new firms entered, and each reached a 10 percent share within three years.

5. 3.

   Esme applies card A to card B. Does the presumption of harm apply, and why?

   • No: the market's HHI today is 2,750, so it is already highly concentrated and the merger changes nothing
   • Yes: the HHI rises by 600 to 3,350, above 1,800, and the merged firm's share of 35 is over 30
   • No: the HHI rises by 35, the sum of the two firms' shares, so the rise is under 100
   • Yes, and so the merger is illegal, since the HHI over 1,800 settles the case under the guidelines
6. 4.

   Kira reads the firms' case on card C. Which is the strongest objection to using it to rebut the presumption?

   • The firms are merging, so the firms have a reason to say whatever helps them win approval
   • Two entries in ten years is too few to count, so entry cannot rebut a presumption
   • Cost savings of $12 million show the merger helps buyers, so the entry evidence is not needed
   • Past entry shows entry can happen, not that it would come soon and big enough to offset 600 points
7. 5.

   Luz wants evidence to test the firms' claim about entry. Which would help most?

   • How long a new firm needs to enter and reach a competitive share, against the harm meanwhile
   • The names of the two firms that entered, since knowing who they were would show if they are rivals
   • Whether the merging firms' costs of $12 million are accurate, since savings do not affect entry
   • The market's HHI before the merger, 2,750, since a higher figure would show entry is harder

8. Use this

   Cards A to C on two firms that watch each other's prices (all made up for practice). Card A, "One year's choices (made up)". Written for this sheet. Table, each firm's profit a year, columns Firm 1's move | Firm 2 holds | Firm 2 cuts: Firm 1 holds | $90 each | Firm 1 $30, Firm 2 $130; Firm 1 cuts | Firm 1 $130, Firm 2 $30 | $60 each. Card B, "Many years (made up)". Written for this sheet. Summary in our words, not a quotation: the firms meet every year and each sees the other's price. If a firm cuts, the other cuts the next year and both stay at $60 each every year after. Card C, "A commentator (made up)". Written for this sheet. Summary in our words, not a quotation: a commentator says the two firms charge the same high price year after year, which proves they made an agreement.

9. 6.

   Tala uses cards A and B. If the firms will meet for several more years, when does holding beat cutting once?

   • Holding is better in the first year alone, since a cut in the second year is not noticed
   • Holding is better if at least two more years follow: cutting gains $40 once, then loses $30 a year
   • Holding is better if ten or more years follow, since the $30 yearly loss builds slowly
   • Cutting is better, since a firm earns $130 against $90 in the year it cuts
10. 7.

    Ari tests the commentator's claim on card C using cards A and B. What is the best verdict?

    • Weakly supported: with repeated play each firm can hold its price alone, so no agreement is needed
    • Refuted: firms that cut in card A's table show prices cannot stay high without an agreement
    • Supported: identical high prices year after year can come from an agreement between the firms alone
    • Cannot be judged: price decisions are private, so no outsider can say whether firms agreed
11. 8.

    Noah looks for evidence that would show an actual agreement. Which would help most?

    • Whether the firms' prices are higher than their costs, since a gap would show an agreement
    • The firms' profits for next year, since a higher profit would suggest the firms agreed
    • The prices of other firms in the same market, since parallel prices elsewhere would settle the claim
    • Messages or meetings between the firms about prices, which identical prices alone cannot show

12. Use this

    Cards A to C on restaurants in one district (all made up for practice). Card A, "Restaurants in the district (made up)". Written for this sheet. Table, columns Year | Restaurants | Average profit per restaurant: Year 1 | 8 | $60,000; Year 2 | 12 | $35,000; Year 3 | 16 | $15,000; Year 4 | 18 | $4,000. Each restaurant has its own menu and sets its own prices. Anyone may open a restaurant. Card B, "A city plan (made up)". Written for this sheet. Summary in our words, not a quotation: the city proposes to limit the district to 12 restaurants. Card C, "Two statements (made up)". Written for this sheet. Summary in our words, not a quotation: Speaker R says profit near zero shows the restaurants are in perfect competition, like wheat farms. Speaker T says the limit would protect restaurants from ruin.

13. 9.

    Milo reads card A. Which account of Years 1 to 4 fits the evidence best?

    • Entry will stop at 18, since profit of $4,000 is above zero and so no more restaurants will enter
    • Profit fell because the restaurants raised their prices, which drove customers away from them
    • High profit drew in new restaurants, and each entry cut the profit of all until it was near zero
    • Falling profit drove restaurants out, so the number of restaurants fell over the four years
14. 10.

    Bo weighs speakers R and T on card C against card A. Which statement fits the evidence best?

    • Both are wrong, since profit of $4,000 shows the district has too many restaurants for any to survive
    • R is wrong: each restaurant has its own menu and prices, so near-zero profit reflects free entry
    • R is right: profit near zero is the mark of perfect competition, so the restaurants are like wheat farms
    • T is right: the limit of 12 would keep profit at $35,000 each, which protects the restaurants from ruin