Indicate whether each of the following statements is true or false and thoroughl
ID: 1233206 • Letter: I
Question
Indicate whether each of the following statements is true or false and thoroughly explain why.A. A monopolistically competitive firm that is incurring a loss should immediately cease operations.
B. A monopoly will always earn economic profit because it is able 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. When a firm is able to sets its price, its price will always be less than MR.
Explanation / Answer
(a)TRUE. In the long run, if a firm is earning economic profits, more firms will enter the market. If the firm is incurring economic losses, then firms will leave the market. (b)FALSE. Monopoly does not guarantee economic profits even if the firm can dictate its prices. When the price is lower that the average total costs, then the firm suffers losses. If the price is greater than the average variable costs, then the firm can continue its operations in a short run. Being a monopoly can still suffer losses since monopolies face costs and price pressures. (C)False In a perfect competition, zero profit maximization will occur since in perfect competition, as companies make more profit, others will see opportunity. Competitors has seen no barriers to entry in the market, many firms will enter the market, will raise its production and drives prices down. This will bring profits down. However, when profits go down too much, companies will be forced out of business and the survivors will be better off. So, in the long run, there is competitive equilibrium in a perfectly competitive economy. On the other hand, monopolistic competition, because there are so many relatively weak firms, there are no barriers to entry. Although not as perfectly easy as in perfect competition, companies can enter the market relatively easily. This makes for a long-term equilibrium competition of no profit. When there is profit to be made, just as in perfect competition, new companies come in and take that profit away through expanded production and dropping prices. (D) True When a firm is to maximize its profits it would charge a lower price since with a lower price the company can sell more units of its products. (E) False A firm will always sets its price at MR = MC