Question

True or false?

a) “Under perfect competition the value of the Lerner Index is equal to 0.” _____________

b) “In a monopolistic market the deadweight loss does not always occur”. _____________

c) “The existence of scale economies is the main reason for the existence of multiproduct firms”. _____________

d) “The short run industry supply curve is obtained by adding up the average cost curves of all the firms in the industry.” ______________

Answer 1

Answer a- True

Explanation- Lerner index is a measure of market power. Its value ranges from 0 to 1. When a market has no market power, it is given by 0 and 1 indicates perfect market power. In case o perfect competition the Lerner index is always 0 because perfectly competitive firms do not have market power. They are price takers and cannot infuence the market price.

Answer b-False

Explanation-Deadweight loss is the lost welfare of the consumer due to a market failure, inefficiency or intervention. In case of monopolist markets deadweight loss always occurs because the monopolist sets a price higher than the marginal cost. This means there will be people willing to pay more than the cost of production, but they will not be able to purchase the good because the monopolist is maximizing profit by charging a price higher than MC.

Answer c-True

Explanation-E Multiproduct firms are those firms that produces multiple goods. Economies of scale exist in the production when the average cost of production and distribution is generally lower for larger-scale producers than for smaller-scale producers. Since, a multi product firm is a large scale producer by itself, the reduction of cost of production, distribution, transportation etc are low and hence such firms can enjoy economies of scale.

Answer d-False

Explanation-Short run industry supply curve is the lateral summation of that part of short run marginal cost curves of the firms which lie above the average variable cost constitutes the supply curve of the industry. It always slopes upwards since the short run marginal cost curve of the firms always slopes upward.