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?

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

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

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

4. 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.

5. 3.

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

   • Five rides at $6: the price is still above the $5 cost, so the ferry sells until the price falls to cost
   • 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
   • One ride at $10: the highest price on the card, so one ride earns the most for each rider
6. 4.

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

   • The 3rd rider pays $8 but the ferry loses its $5 cost, which leaves a $3 gain of revenue
   • The 3rd ride adds less because riders are fewer at $8 than at $9, so the ferry sells fewer rides
   • To sell a 3rd ride the ferry must cut the price to $8 for everyone, so revenue goes from $18 to $24
   • The price falls $2 to reach the 3rd rider, and a $2 fall is the revenue the ferry gives up on each rider
7. 5.

   Luz compares the ferry with the competitive price in card B. Which statement is best supported?

   • The only ferry sells fewer rides at a higher price: 3 at $8, against 6 at $5 if many ferries competed
   • Competition is better for the ferry, since 6 rides at $5 earn it more than 3 rides at $8
   • The only ferry sells fewer rides but at the same $5 price, since its cost is the same as theirs
   • The only ferry sells more rides at a lower price, since it has no rivals and can serve everyone

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?

   • 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 if B holds, but hold if B cuts, since a price war leaves A with the smaller profit
   • 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 $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
    • 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
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?

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

    Noah reads card A. What keeps profit high in Town X and low in Town Z?

    • X has free entry and Z has a license, so X's profit is high because it has so few carts
    • Profit in X is high because it has one cart, and a small number of carts alone fixes profit
    • Town X's single license blocks entry, so its profit stays high; Z has free entry, so its profit falls to $25
    • Both towns have barriers, since the $50,000 for equipment in Z blocks new carts just as the license does in X
14. 10.

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

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