In the follow scenarios keep the model of monopolistic competition in mind. Scen
ID: 1109877 • Letter: I
Question
In the follow scenarios keep the model of monopolistic competition in mind.
Scenario A: If the price is ______ than average costs, then firms are earning __________ economic profit and we should expect firms to _________ the industry.
less; negative; exit
B. less; positive; enter
C. equal to; zero; exit
D. more; negative; exit
Scenario B: If an industry has large ________ relative to another industry, then we should expect _________ firms to operate in a long-run equilibrium of that industry.
A. fixed costs; more
B. marginal costs; more
C. fixed costs; less
D. marginal costs; less
A. slope up; decrease; increase
B. slope down; increase; decrease
C. slope down; decrease; increase
D. slope down; decrease; decrease
In the follow scenarios keep the model of monopolistic competition in mind.
Scenario A: If the price is ______ than average costs, then firms are earning __________ economic profit and we should expect firms to _________ the industry.
less; negative; exit
B. less; positive; enter
C. equal to; zero; exit
D. more; negative; exit
Scenario B: If an industry has large ________ relative to another industry, then we should expect _________ firms to operate in a long-run equilibrium of that industry.
A. fixed costs; more
B. marginal costs; more
C. fixed costs; less
D. marginal costs; less
Scenario C: If firms have average cost curves that________ with the quantity sold, then opening trade will ________ the total number of firms and ________ the average price.A. slope up; decrease; increase
B. slope down; increase; decrease
C. slope down; decrease; increase
D. slope down; decrease; decrease
Explanation / Answer
(Scenario A) Option (A)
When Price is lower than ATC, Profit is negative and since exit is free in long run, some firms will exit the industry.
(Scenario B) Option (C)
High fixed costs pose high barriers to entry in that industry, therefore number of firms operating in such industry will be relatively less.
(Scenario C) Option (B)
Downward sloping average cost curve imply economies of scale. Therefore, opening up of trade will mean that more firms will enter the market, increasing the number of firms and increasing market supply, shifting market supply curve rightward and lowering market price.
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