Question

For each of the following statements, indicate whether it is true, false, or uncertain and EXPLAIN WHY. a. In the long-run the typical monopolistically competitive firm earns no economic profit and that indicates that the firm is economically (productively) efficient. b. Monopolists have complete pricing freedom as they seek to maximize profits. c. In the short-run, if price drops below the average total cost, the perfectly competitive firm must shut down immediately.

Answer 1

Answer:

a.

FALSE

The argument above is in part inaccurate. In the long run, the monopoly dominant firms gain no economic profit at the profit generating production as their LRAC= LRAR at.

The firm is not effective economically (productively) though.

A monopolistically dominant firm is not successful effective because it does not achieve the average cost curve at the minimum level. The difference between supply and supply of the equilibrium at the minimum average cost is called overcapacity.

b.

FALSE

The monopolist has the power to make the price to maximize the profit. The monopolist, however, always has to respect demand rule of law. Its AR-curve is a sloping downward curve.

It indicates that if the monopolist decides to increase production, he will have to lower the price. It shows that to increase income, the monopolist can set its price but can not set any price.

c.

FALSE

The shut down point for reasonably competitive firms is Price= AVC.

When the price falls below the average cost of the product, otherwise the business must shut off.

Otherwise, the business must continue to manufacture until the price falls below the average cost of the product. It will still deliver, even if the average income or price is below the average output.

Answer 2

Answer:

The answer is a) True, (b) False, (c) True

Explanation:

A) In the long run, a monopolistically competitive firm will make zero economic profit. This is as a result of the amount of influence the firm has over the  market because of brand loyalty, it can raise its prices without losing all of its customers.

(B) In order to maximize profits, the monopoly in equilibrium would be producing at an output level where marginal revenue be equal to marginal cost (MR = MC).

(C) If the price falls below average variable cost, then the firm is better off shutting production in the short run. By producing any output, it does not generate enough revenue to cover variable cost let alone any fixed cost.