For each of the following statements, indicate whether it is true, false, or uncertain and EXPLAIN...
For each of the following statements, indicate whether it is true, false, or uncertain and EXPLAIN WHY.
a. In the long-run the typical monopolistically competitive firm earns no economic profit and that indicates that the firm is economically (productively) efficient
b. Monopolists have complete pricing freedom as they seek to maximize profits.
c. In the short-run, if price drops below the average total cost, the perfectly competitive firm must shut down immediately.
Homework Answers
a. In the long-run the typical monopolistically competitive firm earns no economic profit and that indicates that the firm is economically (productively) efficient.
The statement is FALSE.
The above statement is partially wrong. In the long run the monopolistic competitive firms earns no economic profit as its LRAC=LRAR at the profit maximizing output.
However, the firm is not economically (productively) efficient. A monopolistically competitive firm is not productively efficient because it does not produce at the minimum point of its average cost curve. The difference between the equilibrium output and output at the minimum of average cost is called as excess capacity.
b. Monopolists have complete pricing freedom as they seek to maximize profits.
The statement is FALSE.
The monopolist has a strong ability to make the price to maximize the profit. However, the monopolist also has to obey the rule of law of demand. Its AR curve is a downward sloping curve. It means that if the monopolist wants to increase the output, he has to decrease the price. It indicates that the monopolist can fix its price but cannot fix any price to maximize the profits.
c. In the short-run, if price drops below the average total cost, the perfectly competitive firm must shut down immediately.
The statement is FALSE.
The perfectly competitive firms shut down point is Price = AVC. If the price falls below the average variable cost, then the firm will shut down. It otherwise means the firm will continue to produce till the price goes below the average variable cost. It will continue to produce even if the average revenue or price is below the average cost.
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