Question

Q 1) explain the short-run break-even price as well as shut-down price for a competitive firm. (2 points)

Q 2) Why is the level of output where marginal revenue equals marginal cost called as the profit-maximizing output under perfect competition? Show your proof. (2 points)

Q 3) Describe the shape of short run supply curve in perfect competition. (2 points)

Q 4) Do you agree that companies under perfect competition as well as monopoly are making profits in the long run? If yes, why? If not, why not? (2 pints)

Q 5) Compare (individual demand curve and marginal revenue curve) under perfect competition and  (individual demand curve and marginal revenue curve) under Monopoly. (2 points).

Please answer all five questions, 3-5 sentences each question. (10 possible points)

Answer 1

1) Break even point is a point where price equals to AFC. Below this point is less profitable, but will not bring losses.

Shutdown point is a point where price equals to AVC. Below this point will bring losses to the firm. In this case firm will stop producing temporarily in the short run.

2)

Firm in perfect competition always produce at point where price equal to MC=MR.

If avarage cost exceed MR it will lead to losses. So few firms will exit from the market. If AC is less than MR lead to profits. So new firm's enter into the market.

So price is always equal to MC=MR.

3) Portion of MC curve above the AC curve is supply curve of a a perfectly comparative firm in the short run. Upwards vertical straight line(left to right upwards).

4) Companies under perfect competition only get normal profits(zero economic profits). Because of free entry and exit.

Companies under monopoly get super normal profits in the long run. Because entry and exit is highly restricted.

5) Demand curve(AR)= MR is a horizontal straight line in perfect competition.

Demand curve in monopoly is AR. And MR is at half of the demand curve.