Question

1.

In general, a monopolist:

• can select any price and quantity combination that is on the demand curve.

• is limited by the price and quantity that government regulations set.

• is a price taker.

• can select any price and quantity that it wants.

2.

Economic profit in the long run is

Multiple Choice

• possible for both a monopoly and a perfect competitor.

• possible for a monopoly but not for a perfect competitor.

• impossible for both a monopolist and a perfect competitor.

• only possible when barriers to entry are nonexistent.

Answer 1

Perfect competition is a market where there is a large number of buyers and sellers in the market. Each firm produces homogenous products and is a price-taker and decided what quantity to sell in the market. There is perfect knowledge in the market. There are free entry and exit of the firms in the long-run. Thus, a perfectly competitive firm can earn super-normal profits or normal profits in the short-run but can only earn normal profits (zero economic profits) in the long run.

Monopoly is a market structure where there is a large number of buyers but only one seller in the market. The firm sells a product that has no close substitutes in the market. The monopolist a price maker can produce at any point on its demand curve. The entry of firms in a monopoly market are restricted. Thus, a monopolist can earn supernormal profits even in the short-run as well as the long-run as entry is restricted.

(1) A monopolist is a single seller in the market and a price-maker. Thus, in general, it can select any price and quantity combination that is on the demand curve.

(2) Economic profit is the difference between the total revenue and total costs (includes both implicit and explicit costs). In the long-run, a perfectly competitive firm can not earn positive economic profits as entry and exit of firms is free. but a monopolist can earn positive economic profits as the entry of firms is restricted. Thus, economic profit in the long-run possible for a monopoly but not for a perfect competitor.