2. Indicate whether each of the following statements is true or false and explai
ID: 1118790 • Letter: 2
Question
2. Indicate whether each of the following statements is true or false and explain why a. A competitive firm that is incurring a loss should immediately cease operations. b. A pure monopoly does not have to worry about suffering losses because it has the power to set its prices at any level it desires c. In the long run, firms operating in perfect competition and monopolistic competition will tend to earn normal profits. d. Assuming a linear demand curve, a firm that wants to maximize its revenue will charge a lower price than a firm that wants to maximize its profits. e. If P> AVC, a firm's total fixed cost will be greater than its loss. f. When a firm is able to set its price, its price will always be less than its MR. g. A monopoly will always earn economic profit because it is able to set any price th at it wants to.Explanation / Answer
Answer:- A competitive firm that is incurring a loss should immediately cease operations.
Correct Answer:- False
Reason:- A competitive firm will continue to produce its output in the short run if the prices are lower than the average total cost but more than the variable cost. In fact when the firms shut downs its operations then it will face losses as it has to pay the fixed costs. If the variable costs are more than the price, then the firm should shut down the operations.
Answer:- A pure monopoly does not have to worry about suffering losses because it has the power to set its prices at any level it desires.
Correct Answer:- False
Reason:- the monopoly cannot fix the price of the products at its own will. This is because monopoly has a limited control over the price of products. The demand curve for the monopolistic firm is the demand curve of market having a negative slope. Thus if the price is increased, the demand will fall and it will incur the loss.
Answer:- In the long run, firms operating in perfect competition and monopolistic competition will tend to earn normal profits.
Correct Answer;- true
Reason:- In long run, some firms will enter the market and some will exit and thus the average loss and profit will be balanced and therefore only normal profit will be earned.
Answer:- Assuming a linear demand curve, a firm that wants to maximize its revenue will charge a lower price than a firm that wants to maximize its profits.
Correct Answer:- True
Reason:- For maximizing the revenue, the marginal revenue should be zero while for earning higher profits, the difference between the revenue and cost should be the highest. In order to generate greater revenue, the firm is required to decrease its prices due to negative slopped demand curve.
Answer;- If P > AVC, a firm's total fixed cost will be greater than its loss
Correct Answer:- false
Reason:- the condition P>AVC means that prices are more than average variable cost and thus a positive contribution margin which is the amount earned by the firm above its variable cost.
Answer;- When a firm is able to set its price, its price will always be less than its marginal revenue (MR).
Correct Answer:- False
Reason:- the firm will set its price where MR=MC.
Answer:- A monopoly will always earn economic profit because it is able to set any price that it wants to.
Correct Answer:- False
Reason:- the monopoly cannot fix the price of the products at its own will. This is because monopoly has a limited control over the price of products. The demand curve for the monopolistic firm is the demand curve of market having a negative slope. Thus if the price is increased, the demand will fall and it will incur the loss.
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