Please answer the following questions. Show your work and then select A, B, C or D as your final answer. Thanks.
Barbershops in a large city would seem to be an example of competitive markets since there are many sellers operating relatively small shops, each seller takes the price of haircuts as given, and the products (haircuts) are very similar between different shops.
Question 1
How could you argue that the barbershop market is not competitive?
Select one:
a. Many barbershops may be locally-owned but are franchises of a single major corporation. Thus, the market is not competitive since it is ultimately only served by one supplier.
b. Each barbershop sells a very differentiated product to its clients since it is rare that two clients receive the exact same haircut (perfect substitute).
c. Since barbershops do not sell any physical or tangible items to customers, the prices charged are not constrained by market forces and can be unusually high or low.
d. Most barbershops only serve clients who live relatively close by. A barbershop on one side of town usually does not attract clients who live or work many miles away on the other side of town. Thus, barber shops tend to only compete with the relatively few other barbershops that are nearby.
Question 2
Is it possible that each barbershop could face a demand curve that is not perfectly elastic?
Select one:
a. No; each barbershop in a large city is indistinguishable from the others (i.e., they are perfect substitutes), and so the demand for any individual barbershop is perfectly elastic.
b. No; since clients are not willing to accept price changes for their haircuts from one month to the next (e.g., $15 haircut this month, $20 haircut next month, etc.), the price will remain constant in the long run and thus demand is perfectly elastic.
c. Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since clients will not stop at every barbershop in the city to find the cheapest price), then they will not face perfectly elastic demand.
d. Yes; demand is only perfectly elastic if the demand curve is upward-sloping, and barbershop demand is downward-sloping.
Question 3
How profitable do you expect barbershops to be in the long run?
Select one:
a. Since they are usually very small, most barbershops will be unable to compete with larger firms with higher fixed and variable costs. Barbershops should expect losses in the long run.
b. Barbershops have the ability to set their own price above the market equilibrium price for a considerable length of time given their small size and the sheer number of other barbershops. Most individual barbershops will enjoy positive economic profit in the long run.
c. Improvements in hair-cutting technology, and the difficulty of new entrepreneurs entering this market, will guarantee above-normal profits for barbershops for the next few decades.
d. Even with a small amount of market power due to attracting only local clients, it is still relatively easy to enter and exit the barbershop industry. Long-run profits will likely be driven down close to zero.
