Question 1 a. Draw a diagram to show the long run equilibrium condition of the perfectly...

Question 1

a. Draw a diagram to show the long run equilibrium condition of the perfectly competitive firm [5 marks]

b. Explain three reasons why monopolies arise [3 marks]

c. When does a perfectly competitive firm temporarily shut down production? When does it leave the industry all together? [4 marks]

d. What obstacles might a group of oligopolists encounter in forming a cartel? [4 marks]

Expert Solution

B.Why monopoly arises:

1.Economies of scale-Some firms have resources which others firms do not have like technology and knowledge of low cost of production.This limits other firms from entering the market.

2.Patents,copyrights,trademarks enables a monopolist to produce product that other firms can't legally produce.

3.Sometimes the government also creates monopoly which gives the government the exclusive right to produce a commodity.

C.When the firm price is such that the firm is not able to cover average cost and is only able to cover the average variable cost or when the price is equal to AVC,then the firm shuts down and leave the market.

D.a.The member of the cartels often resort to cheating by producing more than the limit and lowering price.

b.Cartels are violation of the Sherman act.So,if anyone is found guilty of running a cartel,they can be subjected to punishment.

Rahul Sunny answered 2 years ago

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