Answer to Question #194159 in Microeconomics for fahmida

Question

1. Briefly discuss two major differences between the theory of perfect competition and the theory of  monopoly. 2. What reasons make the demand curve of a perfectly competitive firm completely horizontal? Only  state.

3. Represent the information below in an appropriately labelled diagram with the relevant curves, and  decide whether the firm should continue production or shut down in the short run, using calculations. A perfectly competitive firm produces 100 mugs to maximize its profit. The average total cost (ATC)  is 13 taka per mug and the average fixed cost (AFC) is 4 taka per mug when the firm produces 100  mugs. The firm charges a price of 12 taka per mug.

4.When would a firm be considered a natural monopoly? Explain briefly.

Answer 1

1.In monopoly, the price is set above marginal cost and the firm earns a positive economic profit while perfect competition produces an equilibrium in which the price and quantity of a good is economically efficient.

2.This result means that the price it receives is the same for every unit sold

3.The company should stop production since price of goods is lower than the average total cost (12*100 is less than (14*100)

4. When its efficient to have only one company or service provider in an industry or geographic location since there is no competition