Answer to Question #211075 in Microeconomics for Arwah Bashir

Question

Q7) Answer the following questions making the comparisons between the perfectly competitive and monopoly

firms.

a) Differentiate both with respect to market, nature, resource mobility price information and demand curves.

b) Looking at the short run and long run conditions is it possible for a perfectly competitive firm to survive in the

long run with zero profits? Explain your answer with reason (s).

c) Looking at the short run and long run conditions is it possible for a monopoly firm to survive in the short run

with losses? Explain your answer with reason (s).

Answer 1

(a) i) In perfectly competitive market, firms produce identical goods, while in monopolistic competition, firms produce slightly different goods. In a perfectly competitive market, price equals marginal cost and firms earn an economic profit of zero. ii) In a monopoly, the price is set above marginal cost and the firm earns a positive economic profit. iii) perfectly competitive has a horizontal demand/marginal revenue curve, whereas a monopoly has a downward-sloping market demand curve. iv) in the case of perfectly competition the firms are price takers, whereas in monopolistic competition the firms are price makers

(b) In the short-run, when plant and equipment are fixed, the firms in a purely competitive industry may earn profits or suffer losses. In the long-run, when plant and equipment are adjustable, profits will attract new entrants. As new firms enter, the supply curve shifts to the right, price falls, and profits fall. Firms continue to enter the industry, If firms in an industry are experiencing economic losses, some will leave. The supply curve shifts to the left, increasing price and reducing losses. Firms continue to leave until the remaining firms are no longer suffering losses—until economic profits are zero.

(c) In the short-run, a monopolist firm cannot vary all its factors of production as its cost curves are similar to a firm operating in perfect competition. Also, in the short-run, a monopolist might incur losses but will shut down only if the losses exceed its fixed costs.