Question

Statement 1: For a monopoly firm, the marginal revenue curve is the same as the demand curve for its product. Statement 2: A monopolist uses the same profit maximization rule that the perfectly competitive firm uses. Both statements (1) and (2) are false. Both statements (1) and (2) are true. Statement (1) is true; statement (2) is false. Statement (1) is false; statement (2) is true.

Answer 1

1. For a monopoly firm the demand curve is downward sloping , to increase the quantity demanded the firm has to decrease the price and vice versa. For that reason, the marginal revenue curve lies below the demand curve. The demand and marginal revenue curve is different for the monopolist. For every market structure the profit maximization rule is the same, that is where the marginal cost equals the marginal revenue.

Ans: Statement 1 false and the statement 2 is correct.

2. In the perfect competition, there are large number of buyers and sellers. The product is identical and there is freedom of entry and exit , for these reasons the firm is a price taker in the perfect competition that is the individual firm cannot influence the market price.

Ans: An individual firm cannot affect the market price.

3. The major barrier to entry are, the economies of scale, ownership of a key resources, government created barrier. The economies of scale is the cost advantages enjoyed by the firm, it is the decline in the average total cost as the firm produces more output. The government give patents and copyrights to encourage innovation and this is supposed to act as a barrier to entry.

Ans: All of the given answers.

4. For a perfectly competitive firm the supply curve is the rising portion of the marginal cost which lies above the average variable cost. So the market supply curve will be the sum of the marginal cost curve. The perfectly competitive firm has the horizontal demand curve which shows the perfectly elastic demand.

Ans: Both statements are true.

5. The market is efficient when the total surplus is maximized , the total surplus is the sum of both the consumer and the producer surplus.

Ans: The sum of producer and the consumer surplus is maximized in the market; there is no dead weight loss.