Question

Answer the following questions.

Don’t copy paste from any internet sources. Write in your own words.

Q1. Explain with the help of graphs, how price and output is determined in the Monopoly.

Q2. Describe the features of Perfect Competition and how efficiency is achieved under Perfect competition.

Q3. Explain Product differentiation strategy under Monopolistic competition and how price and output is determined in a long run under Monopolistic Competition.

Answer 1

Ans) 1) Monopoly is where there is single seller selling unique product. There are high barrier to entry and exit.

Demand curve for a monopolist is downward sloping and marginal revenue curve lies under the demand curve.

A profit maximising firm produces the quantity where MR and MC curve intersect and then uses demand curve to determine the price.

Since monopolist charges a price which is above marginal cost, there is deadweightloss.

2) Perfect competition is where there are many sellers selling homogeneous products. Firms are price takers. There are no barrier to entry and exit. In long run, a Perfectly competitive firm will always earn zero economic profit.

For an individual firm, market price is equal to marginal revenue and also acts as demand curve.

A profit maximising firm produces the quantity where MR and MC curve intersect. Since, Perfectly competitive firm charges the price which is equal to marginal cost, there is no deadweightloss i.e economic efficiency is reached.

3) Monopolistic competition is where there are many sellers selling homogeneous but differentiated products. Product differentiation can be in form of quality or services.

Due to product differentiation, seller is able to charge a higher price i.e firms are not price takers.

In long run, a monopolistic firm will always earn zero economic profit due to ease of entry and exit.

A profit maximising firm produces the quantity where MR and MC curve intersect and then uses demand curve to determine the price. In long run, price is equal to ATC and firms earn zero economic profit.