Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.

1. There are hundreds of colleges that serve millions of students each year. The colleges vary by location, size, and educational quality, which enables students with diverse preferences to find schools that match their needs.
2. A few major airlines account for the vast majority of air travel. Consumers view all airlines as providing basically the same service and will shop around for the lowest price.
3. Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks.
4. The government has granted a patent to a pharmaceutical company for an experimental AIDS drug. That company is the only firm permitted to sell the drug.

1. Doesn't describe a competitive market

One of the assumptions of a competitive market is that goods and services are homogenous. This means that goods and services are identical and buyers cannot tell the difference between goods and services. Because colleges vary by location, size, and educational quality,  this seems to violate the assumption of homogenous goods and services.

2. Doesn't describe a competitive market.

In a competitive market, prices are set by the forces of demand and supply. Firms cannot set the market price. Firms and consumers are price takers. If consumers can make choices based on the price, it violates the homogeneity of prices assumption

3. Describes a competitive market.

One of the assumptions of a competitive market is homogeneous goods. Consumers are indifferent about where they buy socks. So this is in line with the homogeneity assumption

4. Doesn't describe a competitive market.

In a perfect competition, there are no barriers to entry or exit of firms. The government giving patents to firms is a form of barrier to firms and this violates the assumption of no barriers to entry or exit of firms

Explanation:

A perfect competition is characterised by many buyers and sellers of homogenous goods and services. Market prices are set by the forces of demand and supply. There are no barriers to entry or exit of firms into the industry.

In the long run, firms earn zero economic profit. If in the short run firms are earning economic profit, in the long run firms would enter into the industry. This would drive economic profit to zero.

Also, if in the short run, firms are earning economic loss, in the long run, firms would exit the industry until economic profit falls to zero.

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