. Indicate whether each of the following underlined statements is true or false,
ID: 2677712 • Letter: #
Question
. Indicate whether each of the following underlined statements is true or false, andexplain your answer.
a. When a monopolist maximizes profits, the price is greater than the marginal cost
of producing the output. This means that consumers are willing to pay more for
additional units of the product than these additional units cost to produce. Thus,
the monopolist should produce and sell additional units of output.
(Hint: How should a monopolist set its output to maximize profits?)
b. In a monopolistically competitive market, a firm has market power because it
produces a differentiated product. This means that the firm earns positive
economic profit in the long run.
(Hint: A monopolistically competitive market allows for free market entry and exit.)
Explanation / Answer
a. TRUE
monopolists produce at the level where their marginal revenue is equal to their marginal cost. The problem is, for a monopolist its marginal revenue is less than the price it has to charge, which means that at the profit maximizing level of output (where MR=MC), marginal cost will be less than price(price>mariginal cost): evidence of allocative inefficiency
b. FALSE
it has market power beacuse it doenot allow for free market and exit not for producing a differentiated product..
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