Question

1. - How do you determine the profit maximizing (loss minimizing) quantity for the perfectly competitive firm to produce?
2. - Assume a competitive market has firms earning large economic profits. What is expected to happen over time in this competitive market and to firm's profits?
3. - Why is the demand curve facing a monopolist downward sloping while the demand curve facing a perfect competitor is horizontal?
4. - How can a monopoly maintain its single-seller status?

 

Answer 1

1- How do you determine the profit maximizing (loss minimizing) quantity for the perfectly competitive firm to produce?

Answer: perfectly competitive firm produce where Marginal Revenue equals Marginal cost to maximize profits. as perfect competitive firm are price taker and demand curve is horizontal its MR=Price.Mrginal revenue is the revenue generate from selling extra unit and Marginal cost is cost of producing one extra unit. so, if firm produce where, MR is greater than MC firm can increase profit by producing more output. and when MC is greater than MR then producing at this level will reduce the profit as cost is more than revenue of that extra unit.

so, firm will produce where MR=MC.

2- Assume a competitive market has firms earning large economic profits. What is expected to happen over time in this competitive market and to firm's profits?

answer: when there is profit in competitive market, firm have incentive to enter the market. so, over the time firms will enter into the market. And in the long-run with this entry and exit of the firms, there will be zero economic profit.

3- Why is the demand curve facing a monopolist downward sloping while the demand curve facing a perfect competitor is horizontal?

the main reason is monopolist is a price maker and perfectly competitive firms are price takers. in monopoly there is only one firm thus, it has power to charge whatever they want but they have to behave or they decides the price by the willingness of the costumers. thus, due to market power monopoly have downward sloping demand curve.

in perfectly competitive market there is perfect Knowledge about market and firms produces the homogenous product. so they are price takers and they have to charge the market price thus at anu quantity price will be same and firm will have horizontal demand curve.

4- How can a monopoly maintain its single-seller status?

Answer: the main reason that monopoly is single seller is restrictions of new entry.

firm has Information that is not available to others. firm has economies of scale and the unique product that is hard to make for anyone else. so if monopoly wants to maintain the single price status. there must be restriction of new entry and should have economies of scale and resource ownership that does not have with others.