Unit 4 June 2003 Answers

Section A

Question 1

No answer available for question 1.

Section B

Question 2

No answer available for question 2.

Question 3

(a) Identify the characteristics of a contestable market, and explain how contestability can lead to benefits for consumers. [10]

Focus on either perfect competition or monopolistic competition or contestable markets as discussed in class.

This can be shown diagrammatically as shown below. The MC curve is the market supply curve under perfect competition and D the demand curve under perfect competition. The shaded area, PmXYPpc, represents the increase in consumer surplus gained from changing market structure from a monopoly to perfect competition. This leads to greater efficiency and improved product quality, so consumers benefit from increased contestability.

Figure 1, comparing price and output under monopoly and perfect competition

If there is less contestability in the market consumers can also benefit, as a shift in the market structure toward a less contestable market structure such as monopoly will cause the MC curve to lower from MC to MC' as firms are able to take advantage of economies of scale. This gives the consumer a lower price, P', and a greater output, Q' is produced.

Figure 2, showing how under a monopoly consumers can benefit from economies of scale achieved by the firm

(b) Discuss the extent to which markets for spectator sports are economically contestable in terms of their characteristics and their consequences. [15]

Question 4

No answer available for question 4.

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