Indicate wheather each of the following statements is true or false and explin w
ID: 1101608 • Letter: I
Question
Indicate wheather each of the following statements is true or false and explin why.
a) A competitive firm that incurring a loss should immediately cease operation.
b) A pure monopoly does not have to worry about suffering losses because it has the power to set it 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 tahn 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 that it wants to.
Explanation / Answer
a) A competitive firm that incurring a loss should immediately cease operation.
False.Not necessarily. A firm might be incurring losses. There are two components to a cost function. The fixed cost and the variable cost. The variable costs component is the one known as operational costs. These are the ones required for day to day functioning. So as long as the firm recovers enough money to pay for variable costs it might keep functioning. The fixed costs components that is price paid for equipment and land can be paid later.
b) A pure monopoly does not have to worry about suffering losses because it has the power to set it prices at any level it desires.
False. Monopoly means single supplier. Ideally a monopoly should function at profit maximising point but if it is a government run monololy then the the government may fix another point where it is willing to take losses for the benefit of the people.
c) In the long run, firms operating in perfect competition and monopolistic competition will tend to earn normal profits.
True. In a monopolistic competition, over time more and more firms will enter until in long run it becomes a perfect competition.
d) Assuming a linear demand curve, a firm that wants to maximize its revenue will charge a lower price tahn a firm that wants to maximize its profits.
False. Both will charge the same price. other wise as the demand curve is flat anyone with a lower price will have all the customers. To maximise profit or revenue the variable will be the quantity produced.
e) If P > AVC, a firm's total fixed cost will be greater than its loss.
True. The difference between the price and AVC is loss. The difference between TVC and AVC is fixed costs. If there are losses then Fixed costs > Loss. If this condition is not satisfied then it means the firms has profits.
f) When a firm is able to set its price, its price will always be less than its MR.
True. this will lead the form to a point where MR=MC and hence it can have supernormal profits.
g) A monopoly will always earn economic profit because it is able to set any price that it wants to.
False. Monopoly means single supplier. Ideally a monopoly should function at profit maximising point but if it is a government run monololy then the the government may fix another point where it is willing to take losses for the benefit of the people. Ex: nationalised corporations in key sectors like banking, manufacturing and mining.