Question

Both monopolists and purely competitive firms are assumed to behave as if they seek to maximize profits, yet monopoly is held to result in an inefficient allocation of resources as compared to pure competition. Explain. Marginal costs serve as a guide as to how much of a good to produce, while average variable costs help indicate whether to produce at all. Explain. 8 points Why did Professor Snow invest additional resources to make this class an effective one? He could have received the same pay for doing considerably less work. Why didn't you allocate the amount of resources necessary to earn an A in this class? 9 points

Answer 1

Q4) Answer

1) Purely competitve firms are assumed to behave as if they seek to maximise profits, because they are faced with competition from large number of firms which produce the homogenouse good/commodity. Hence there exists a strong competition among the firms.

2) But the firm under Monopoly face no competition as the firm itself is an industry and decides both quantity of the good to be produced and the price to be charged per one unit of the good

3) When there is a rise in price that the consumer has no choice of substitute goods to be substituted in place of the good produced by a monopolist i.e. in the absence of close substitutes for the good produced by a monopolist

4) This gives the power to the monopolist to charge any price for the good and to compramise with the quality of the good. This in turn results in higher degree of inefficient allocation of resources as compared to pure competition.

5) Therefore, it is the monopoly power that is enjoyed by a monopolist is the reason for the inefficient allocation of resorces. But this is not applicable in all the cases as even government acts as a monopoly for the public welfare.

6) Marginal Costs (MC) serves as the guide to determine how much to be produced as the equilibrium level of output is determined at the point where the following two conditions are met or satisfied:

A) Marginal Cost = Marginal Revenu i.e. MC = MR

B) MC rises above MR after the point where MC = MR

7) The firm is said to be in equilibrium or in Optimal position and can obtain maximum profits at this level of output.

8) The Average variable Cost (AVC) helps in taking a decision to produce a good or not i.e. In the short run when the AVC is less then or equal to price, it indicates that the firm has to shut down or stop producing the good since the firm is not able to cover its variable costs in the short run through its revenues.

*** Q5 has incomplete details to answer.