Answer to Question #212192 in Microeconomics for Gloria

Question

Question 1.

Consider a monopolized industry. Is the deadweight loss from this industry greater if (1) the government sets price equal to average total cost or (2) the government sets price equal to marginal cost? Why? Use examples of monopoly form your own country to answer this question.

 

 

Question 3.

 

"What is the point of entering a perfectly competitive industry if it is simply to earn zero profits anyway?" Discuss this statement with reference to the long and short run, as well as to heterogeneity across firms.

 

Question 4.

 

Why is it the case in a long-run monopolistically competitive equilibrium that the firm’s demand curve is tangent to its average cost curve? Why could it not be a long-run equilibrium if the demand curve “cut through” the average cost curve

 

 

Answer 1

1.Whenever the government sets the price at the average total cost, the deadweight loss is higher than when the price is set at the marginal cost. Because if the commodities aren't manufactured, the amount exchanged in the market will be reduced, resulting in more dead weight loss. Due to the lack of competition in monopoly industries, they will become inefficient and less innovative.

3.In the long run, perfect competition is when economic profit is not sustained. The arrival of new firms in the market causes the firm's demand curve to shift downwards, lowering the average and marginal revenue curves. As a result, in the long run, there will be no economic profit.

4.If price equal to average total cost gives us zero economic profit at one location there is no incentive for any other form to enter the market and bring the price further down so that there is an economic loss. Hence demand is always tangent to the average total cost in monopolistically competitive market in the long run.