Question

a) Suppose there are two market structures: A and B. Market A is characterized by free entry and exit
of firms and firms under this structure face a horizontal demand curve. Market B has only one seller.
Identify the market structures. Comment on the pricing mechanism, long-run profitability, and social
surplus under both market structures.

b) Explain why the marginal revenue curve lies below the monopolist's demand curve.

Answer 1

Market A is the perfect competitive market. In this market, firm is a price taker not a maker Therefore, charge price as per it set by the industry . Therefore, there is horizontal demand curve and at the price fir sell entire homogeneous production .In market A, in the long run firm earn normal profit. The reason is that in the long run firm enters and exits from the market therefore, earn normal profit. For example, if firms earn supernormal profit, new firms enter and supply will increase and price will decrease.

Market B is monopoly market. The reason is that monopoly means single seller. Here single seller sale homogeneous and different products to number of consumers. Here the price is decided by the monopoly as per the elasticity of demand. Here in long run ,firm earn supernormal profit because of no entry of firm in the market.

Answer 2) In the monopoly, marginal revenue curve is below the average revenue ( demand curve).The reason is that monopolist must lower the price on all units in order to sell extra units . Therefore additional revenue is less than average revenue.