econ quick questions Why does a perfectly competitive firm face a perfectly elas
ID: 1226020 • Letter: E
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econ quick questions
Why does a perfectly competitive firm face a perfectly elastic demand curve? 2. Why does a monopolist face a downsloping demand curve? 3. Why are long run profits not likely under conditions of perfect competition monopolistic competition? 4. Why are long run profits quite likely under conditions of oligopoly and monopoly? 5. If a perfectly competitive firm is producing at an output where Marginal Revenue is greater than Marginal Cost (MR>MC), it should: a. INCREASE OUTPUT a. INCREASE PRICE b. DECREASE OUTPUT b. DECREASE PRICE c. LEAVE OUTPUT UNCHANGED c. LEAVE PRICE UNCHANGED Circle one in each column. 6. If a monopoly (chapter 15) is producing where MR>MC, it should: a. INCREASE OUTPUT a. INCREASE PRICE b. DECREASE OUTPUT b. DECREASE PRICE c. LEAVE OUTPUT UNCHANGED c. LEAVE PRICE UNCHANGEDExplanation / Answer
1) IN perfect competition all firms sell homogenous goods that are same in nature with no differentiation. Thus if a seller tries to increase price of his good, all consumers tend to switch the seller with those offering already set lower price to which demand reduces sharply. Similarly when a seller lowers it price consumers of other sellers get attract and start purchasing from the seller that is with lowring a little price demand iwll rise sharply. Hence the demand curve is perfectly elastic in nature. Perfect elasticity states that any little change will bring sharp and significant change in demand.
2) IN monopolist industry, sellers sell hetrogenous goods. Goods that are similarr but not same that is goods with differentation. THus, if a seller changes his price not all customers switch the seller only those consumers who are perfectly driven with price shifts and other remain with old ones necause of differential feature of the good. Therefore a monopolist faces downward slope demand curve which isgnifies that a change in price will may mak significant or subsequent change in demand but not perfect change.
3) In short run tiime span is shorter and all resources are not variable thus firms may make profit but in long run new firms get attracted by profit of short run and enter the market, to which profit start getting distributed with increasing number of sellers. This entering and continuing process continue untill all firms set to share profit such that all profit only equalizes all cost that is they start running business at no cost no profit.
4) Under oligopoly and monopoly there are high restrictions on entry, thus even in long run even after getting attracted by huge profits, new firms can not enter because of entry barriers. And thus profits remain even in long run.
5) If perfect competitive firm is operating at MR>MC then it should increase output until MR=MC.
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