Answer to Question #215228 in Microeconomics for Umema

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)

A monopoly market comprises a single seller and deals with goods with no close substitutes, while perfect competition is composed of many sellers dealing with goods with close substitutes. Monopoly firms perform less advertising compared to perfectly competitive firms for resource mobility. Monopoly firms are price takers, while in perfect competitive firms, the prices are determined by the market forces. Information on production techniques is not available to other producers in monopoly firms, while in perfectly competitive firms, the buyers and sellers have perfect knowledge about the market. Monopoly firms have a downward sloping curve, while perfectly competitive firms demand a horizontal line.

(b)

It possible for a perfectly competitive firm to survive in the long run with zero profits. This is because, in the long run, gains and losses are eliminated because of the competition from other firms.

(c)

A monopoly firm can survive in the short run with losses, but it will shut down if losses exceed fixed costs.