Question

Statement 1: A monopoly firm can make positive economic profits in the short run. Statement 2: A monopoly firm can make positive economic profits in the long run. Statement (1) and statement (2) are both false. Statement (1) and statement (2) are both true. Statement (1) is true; statement (2) is false. Statement (1) is false; statement (2) is true.

Answer 1

1. The monopoly firm can positive profits in the short run as well as the long run. This is because their strong barriers to entry, such as economies of scale, ownership of key resource or government given patent works as a barrier. So in the long run as well the monopoly firm can earn positive profits.

Ans: Statement 1 and statement 2 are both true.

2.

Profit =(P-ATC)Q.

  .

= (5-31100

.

= 200

Ans:$200.

3. A negative externality occurs whenever the adverse effect of a consumption or production activity falls on the third party, such as pollution, cigarette smoking etc..

Ans: The production of a consumption of a good or service inflicts costs on third party.

4. For a perfectly competitive firm the shutdown point is where the price is equals the average variable cost. If the price is below the average variable cost , the firm should shutdown the production. The firm is break even when the total revenue equals the total cost , that is where the price equals the average total cost.

Ans: Both statements are false.

5. Predatory pricing is a pricing strategy to drive out the rivals out of the market. In this strategy the price will be set at the lowest minimum pissible so the new firms will struggle to survive in the market.

Ans: Statement 1 is true and statement 2 is false.