Question

Please answer the following questions. (True/False)

1) Any firm that operates in an imperfectly competitive market faces a downward-sloping demand curve for its product.

2) The term "price setter" refers to a firm that faces a downward-sloping demand curve and must therefore set the combination of output and price that will maximize the firm's profits.

3) Because a price setter has control over both the level of output it produces and the price it charges, it can select from a number of different combinations of output and price levels that will maximize its profits.

4) The fact that a firm is a price-setter does not ensure it will make a positive economic profit in the short run and over time.

5) For a monopolist to earn a positive economic profit, price has to exceed average total cost at the level of output at which marginal revenue equals marginal cost.

Answer 1

Answer- (1) True

''Any firm that operates in an imperfectly competitive market faces a downward-sloping demand curve for its product'', this statement is True. The demand curve facing a firm in an imperfectly comepititive industry downward sloping because different firms' product are not homogeneous. The demand curve for an individual firm is downward sloping because the firms have the market power, they can raise prices without losing all of their customers.

Answer- (2) True

''The term "price setter" refers to a firm that faces a downward-sloping demand curve and must therefore set the combination of output and price that will maximize the firm's profits'', this statement is True. A firm that is powerful enough to set the market price that they can charge consumer with. A monopolist set the price of their products on the demand curve at the output level where supply intersect the marginal revenue curve. The profit maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equals to marginal costs.

Answer- (3) True

''Because a price setter has control over both the level of output it produces and the price it charges, it can select from a number of different combinations of output and price levels that will maximize its profits'', this statement is True. The profit maximizing choice of the monopoly will be to produce at the quantity where marginal revenue is equal to the marginal cost, that is MR = MC. If the monopoly produces a lower quantity, then MR > MC at those level of output and the firm can make higher profits by expanding output.

Answer- (4) False

''The fact that a firm is a price-setter does not ensure it will make a positive economic profit in the short run and over time '', this statement is False. Because a price setter firm maximize its profit or minimize losses in the short run, by producing that quantity where marginal revenue is equals to the marginal cost.

Answer- (5) True

''For a monopolist to earn a positive economic profit, price has to exceed average total cost at the level of output at which marginal revenue equals marginal cost'', this statement is True. Because P > ATC means total revenue exceeds total cost and monopolist receives a positive economic profit.