One of the assumptions made by economists is that firms maximise profits. Using appropriate diagram/s, discuss...

One of the assumptions made by economists is that firms maximise profits.

Using appropriate diagram/s, discuss the long run and the short run profit maximization behaviour in a perfectly competitive market and in a monopoly.

In your conclusion you should comment on whether a perfectly competitive market or a monopoly is better for society and why.

Expert Solution

1. In Perfect Competition, under short run a firm may be able to produce economic profits as represented by shared region in Figure 1. It will produce till MC is equal to price of the good. However in the long run economic profits will be gone as there is free entry and exit of the firms, this will remove all economic profits.

2. In Monopoly a frim will produce where MR=MC and will earn high economic profits than under prefect competition. These profits will also be there in long run as well.

3. Perfect competition is better for society as this can be seen in Figure 5. where Monopoly is creating Dead weight loss for society as a whole.

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Rahul Sunny answered 1 year ago

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