Question

In: Economics

Indicate whether each of the following statements is true or false, and explain why. A competitive...

Indicate whether each of the following statements is true or false, and explain why.

  1. A competitive firm that is incurring a loss should immediately cease operations.

  2. A pure monopoly does not have to worry about suffering losses because it has the power to set its prices at any level it desires.

  3. In the long run, firms operating in perfect competition and monopolistic competition will tend to earn normal profits.

  4. Assuming a linear demand curve, a firm that wants to maximize its revenue will charge a lower price than a firm that wants to maximize its profits.

  5. In an oligopoly, the firm that has the largest market share will also be the price leader.

  6. The demand curve facing a firm in a monopolistically competitive market is more elastic than one facing a pure monopoly.

Solutions

Expert Solution

(a) False

A firm will cease operations only when its price falls less than average variable cost.

(b) False

A monopolist faces a downward sloping demand curve. So, if the price obtained by setting MR = MC is less than ATC, the monopolist will suffer a loss.

(c) True

In long run, both forms of firms earn zero economic profit.

(d) True

A profit-maximizing firm charges a price in the elastic region of its demand curve, lying to the left of mid-point of demand curve. A revenue-maximizing firm charges a price in the unit elastic point of its demand curve, which is the mid-point of demand curve.

(e) False

Price leader need not be the firm which is the largest in size.

(f) True

Since monopoly has no competition, a monopolist's demand is less elastic than all other firms, so monopolistic competitive firm faces a more elastic demand.

Rahul Sunny answered 2 years ago
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