Market structures: from perfect competition to monopoly

Grade 12 Social Studies Worksheet - Building Confidence

Circle the best answer.

1. Read this first

   Use this

   Cards A and B on a wheat farm (all made up for practice). Card A, "A wheat market (made up)". Written for this sheet. Summary in our words, not a quotation: hundreds of farms in a county sell identical wheat. The market price is $6 a bushel, and no single farm can change it. Buyers can get all the wheat they want from other farms at that price. Card B, "One farm's extra cost (made up)". Written for this sheet. Table, columns Extra bushel it grows | Extra cost of that bushel: 1st | $3; 2nd | $4; 3rd | $5; 4th | $7; 5th | $10.

2. 1.

   Pia uses cards A and B. How many bushels should the farm grow at a price of $6?

   • Four: the first four bushels cost $19 in total, less than the $24 they sell for, so growing them pays
   • Five: each bushel sells at the same $6, so the farm should grow as many as it can
   • One: the 1st bushel is the cheapest to grow, at $3, so the farm should stop at the cheapest bushel
   • Three: the 3rd bushel costs $5 and sells for $6, but the 4th would cost $7
3. 2.

   One farm tries to sell at $7 a bushel instead of $6. Ari uses card A. What happens to its sales?

   • It sells about half, since half the buyers are loyal to the farm and ignore the lower $6 price
   • It sells just as many, since wheat from one farm is worth more to buyers who like the farm
   • It sells fewer bushels but earns more, since a higher price raises revenue on whatever is sold
   • It sells nothing: buyers can get identical wheat at $6 from the hundreds of other farms
4. 3.

   The market price falls to $4.50. Esme uses cards A and B. How many bushels should the farm grow now?

   • Four: a lower price means the farm should grow more bushels to make up the lost money
   • Two: the 2nd bushel costs $4 and sells for $4.50, but the 3rd would cost $5
   • No bushels: at $4.50 the farm cannot make any profit, so it should stop growing wheat at once
   • Three: the farm grew three bushels at $6, and it should keep growing as many as before

5. Use this

   Cards A and B on a town's only ferry (all made up for practice). Card A, "The ferry's riders (made up)". Written for this sheet. Table, columns Price per ride | Rides per hour that riders will take: $10 | 1; $9 | 2; $8 | 3; $7 | 4; $6 | 5; $5 | 6. The ferry charges one price to everyone. Card B, "The ferry's cost (made up)". Written for this sheet. Summary in our words, not a quotation: the ferry is the only way across the river. Each extra ride costs the ferry $5. If many ferries competed, the price would fall to $5.

6. 4.

   Kira uses cards A and B. What price and number of rides will the only ferry choose?

   • Three rides at $8: the 3rd ride adds $6 of revenue against $5 of cost, but the 4th adds only $4
   • Six rides at $5: the ferry should price at cost, as it would if many ferries competed
   • Five rides at $6: the price is still above the $5 cost, so the ferry sells until the price falls to cost
   • One ride at $10: the highest price on the card, so one ride earns the most for each rider
7. 5.

   Zee reads card A. Why does the 3rd ride add $6 of revenue and not the $8 price?

   • The price falls $2 to reach the 3rd rider, and a $2 fall is the revenue the ferry gives up on each rider
   • The 3rd ride adds less because riders are fewer at $8 than at $9, so the ferry sells fewer rides
   • The 3rd rider pays $8 but the ferry loses its $5 cost, which leaves a $3 gain of revenue
   • To sell a 3rd ride the ferry must cut the price to $8 for everyone, so revenue goes from $18 to $24

8. Use this

   Cards A and B on two gas stations (all made up for practice). Card A, "Two stations on one corner (made up)". Written for this sheet. Table, each station's profit a week, columns Station A's move | Station B holds its price | Station B cuts its price: Station A holds | $50 each | A $20, B $70; Station A cuts | A $70, B $20 | $40 each. Card B, "The law (summary)". Source: Sherman Act, Section 1 (15 U.S.C. 1). Summary in our words, not a quotation: it is illegal for competitors to agree with one another to fix prices.

9. 6.

   Ren reads card A. What is Station A's best move if Station B holds its price, and what if B cuts?

   • Cut if B holds, but hold if B cuts, since a price war leaves A with the smaller profit
   • Hold if B holds, but cut if B cuts, since A should copy what B does
   • Hold either way, since holding keeps the $50 profit that both stations earn when they leave prices alone
   • Cut either way: $70 against $50 if B holds, and $40 against $20 if B cuts
10. 7.

    Each station acts on its best move. Milo reads card A. What do they end up earning, and how does it compare with both holding?

    • They earn $40 each, less than the $50 each if both held, though cutting is best for each alone
    • They earn $40 each, and both would earn less by holding, since holding never pays in this market
    • They earn $50 each, since both stations are better off when each of them cuts its price
    • They earn $70 and $20, since one station cuts and the other holds and so the profits differ
11. 8.

    The stations could both earn $50 by agreeing to hold. Bo reads cards A and B. What is the problem with an agreement?

    • It would make the stations earn $70 each, and customers would object to profits that high
    • It is illegal under card B, and each station would gain $20 by secretly cutting
    • The law bans agreements to raise prices, so an agreement to hold prices is allowed
    • It would lower the stations' profits, since agreements leave the stations earning less

12. Use this

    Card A on three towns' coffee carts (all made up for practice). Card A, "Coffee carts in three towns (made up)". Written for this sheet. Table, columns Town | Carts | Profit per cart a week | Rule for new carts: Town X | 1 | $400 | the town issues one license, to the first cart; Town Y | 12 | $40 | anyone may set up a cart; Town Z | 3 | $25 | anyone may set up a cart, but a cart needs $50,000 of equipment.

13. 9.

    Tala reads card A. Why is profit per cart in Town Y so much lower than in Town X?

    • Anyone may set up a cart in Y, so new carts entered and shared the profit until it fell to $40
    • Y has more carts, so each has more sales and the profit per cart must be above X's $400
    • X charges less, so it sells more coffee than Y's carts do and earns its $400 as a result
    • Y's carts are less skilled than X's, which is why they earn $40 against the $400 of the one cart in X
14. 10.

    Jun lists four claims about card A. Which one goes beyond what the card shows?

    • Town Y has twelve carts, each earning less than a tenth of what Town X's one cart earns
    • Town X is the one town where the number of carts is held to one by a rule
    • Town X's cart charges higher prices than the carts in Town Y
    • Profit per cart is $400 in Town X, $40 in Town Y and $25 in Town Z