Tutorial 6Solutions 15-16

6th Tutorial Perfect Competition and Monopoly Solutions True or False 1. All firms maximise profits where marginal cost equals average revenue. False. All firms maximise profits where marginal cost equals marginal revenue. See Figure 5.2 of Begg and Ward True/False 2. Profit is maximised when total revenue is maximised. False. Profit is maximizes when marginal revenue is equal to marginal cost. See Section 5.2 of Begg and Ward True/False 3. Monopolistic firms in the long run make zero profits. False. In the long run, a monopolist will make supernormal profits. See Section 5.5 of Begg and Ward True/False 4. A monopolistic equilibrium is not allocatively efficient True. Allocative efficiency requires that p=MC. See Section 5.5 of Begg and Ward True/False 5. In contrast to perfect competition, monopolies sell more output, but at a higher price. False. Monopolies are generally considered to raise prices and lower output. See Figure 5.14 of Begg and Ward. True/False Question 1 Delete the appropriate words to enable the text to show the main characteristics of a perfectly competitive market. The perfectly competitive firm will seek to maximise profits where AC=AR / MC=MR. There are few / many firms producing a small part of the total output for the industry. Any change in the output by any one firm will not / will change the market price for the product. Hence, firms in the perfectly competitive market are price makers / price takers. Each firm is identical / different and produces a differentiated / identical product. There is imperfect / perfect knowledge on the part of both buyers and sellers. Both buyers and sellers have free / restricted access into the market. Answer: The perfectly competitive firm will seek to maximise profits where AC=AR / MC=MR. There are few / many firms producing a small part of the total output for the industry. Any change in the output by any one firm will not / will change the market price for the product. Hence, firms in the perfectly competitive market are price makers / price takers. Each firm is identical / different and produces an differentiated / identical product. There is imperfect / perfect knowledge on the part of both buyers and sellers. Both buyers and sellers have free / restricted access into the market. Question 2 With the aid of a diagram, show the long run equilibrium position of a firm in a perfectly competitive market. Standard pc diagram showing equilibrium where MC = MR and P= MR= AR and ATC at tangent to this line. See Figure 5.8 in Begg and Ward. And how we go to this long-run equilibrium? Here is the answer: Question 3 With the aid of a diagram, show the long run equilibrium position of a monopolistic firm. See Figure 5.15 in Begg and Ward. Question 4 Compare the monopoly with perfect competition See Figure 5.16 in Begg and Ward. 1