Question

Q	FC	VC	TC	AFC	AVC	ATC	MC
0	15 000	0	15 000	-	-	-	-
100	15 000	15 000	30 000	150	150	300	15 000
200	15 000	25 000	40 000	75	125	200	10 000
300	15 000	37 500	52 500	50	125	175	12 500
400	15 000	75 000	90 000	375	187.5	225	37 500
500	15 000	147 500	162 500	30	295	325	72500
600	15 000	225 000	240 000	25	375	400	77500

ii. If the price is P100, will the firm be making profit or loss at output of 300 units?
(2 marks)
b. Explain the implication of barriers to entry in a monopoly market structure.
(2 marks)
c. Discuss the short run and long run condition of both a monopoly and a perfect competition
market structure. (4 marks)
d. Using a diagram explain the condition under which a perfectly competitive firm should
shut down. (6 marks)

Answer 1

a) At Q = 300, TC = $52,500 and AVC = $125 When P= 100, TR = $30,000 which is less than TC Thus, firm is making a loss at this point b) The monopoly market is characterized by a single seller selling unique, differentiated product in the market, protected by barriers to entry. With these barriers to entry, the firm is able to enjoy complete market power over the industry and makes excess profits. Competition is barred to enter this industry because of barriers. Thus, these barriers to entry allow the monopoly firm to enjoy complete market control and excess profits in the industry. Monopoly: Short run condition: MR = MC: Long run condition Perfect Competition: Short run condition: P= MC Long run condition: P=LRATC = MC

A perfectly competitive firm should shut down if its P<AVC. This means the firm is not even able to cover its variable costs and must thus shut down its operations. Thus, shut down point: P=min AVC MC MC / MP shut-down P1 price Qi Q2 Thus, for all prices below P1, the firm must shut down, as it would only lead to increasing profits, since the firm will not be able to cover even its variable costs.