(1) A monopolistic competitor is in long-run equilibrium when: A) economic profi
ID: 2444176 • Letter: #
Question
(1) A monopolistic competitor is in long-run equilibrium when:
A) economic profits are equal to zero and the marginal cost curve is tangent to the demand curve. B) economic profits are equal to zero and the average total cost curve is tangent to the demand curve. C) economic profits are greater than zero and the marginal cost curve is tangent to the demand curve. D) economic profits are greater than zero and the average total cost curve is tangent to the demand curve.
(2)Refer to the below figure. The above figure shows the cost structure of a firm producing an information product. Which curve represents the average total cost?:
A) Curve 1 B) Any of the 3 could be ATC. C) Curve 3 D) Curve 2
(3) It has been argued that in the long run monopolistic competition is inefficient because:
A) there are few many firms, each with excess capacity, producing too much output. B) minimum average total costs are achieved but price exceeds marginal cost. C) minimum average total costs are not achieved and marginal cost exceeds price. D) there are too many firms, each with excess capacity, producing too little output.
(4) Use the below figure. When it maximizes its economic profits, the monopolistically competitive firm depicted in the figure:
A) must increase output to reduce the ATC. B) is earning an economic loss. C) is earning an economic profit. D) is earning an accounting profit.
Price Quantity/timeExplanation / Answer
1. The firms in the monopolistically competitive firm earns zero economic profit, this is because in the long run new firms will enter into the market and this will suck out the profits enjoyed by the fims existings fims. The firm is earning zero economic profits whenever the average total cost curve is tangent to the demand curve of the firm. If the avergae total cost curve is above the demand curve the firms is earning positive economic profits and if the ATC is below the demand curve the firm is suffering economic loss.
ANS: B) economic profits are equal to zero and the average total cost curve is tangent to the demand curve.
2. In the graph the average total cost must be 1, and the avergae variable cost is 2. The average total cost will be higher than than the average variable cost.
Ans: A) Curve 1.
3. There are two reasons for the inefficiency in the monopolistic market and they are 1. price exceeds the marginal cost. 2. Excess capacity.
The monopolistically firms produce on the downward sloping portion of the average total cost curve and not on the minimum of the average total cost. So this indiactes that the fims have excess capacity, they can produce more output but they won't.
Ans: D) there are too many firms, each with excess capacity, producing too little output.
4. The firm shown in the grap is clearly earning the positive economic profits, this is because the ATC curve is above the demand curve.
Ans C) Earning an economic profit.
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