Answer to Question #312964 in Microeconomics for Maggie

Question

Compare the perfectly competitive firm and monopolist as to how it makes the following decisions. Hint: use either equations or graphs to illustrate your answer

I. How much to produce

Ii. What to produce

III. Whether or not to shut down in the short run

Iv. What happens in the long run if losses persist

Answer 1

1.how much to produce

In a perfectly competitive market, price equals marginal cost and firms earn an economic profit of zero. In a monopoly, the price is set above marginal cost and the firm earns a positive economic profit. 

2.What to produce

 To differentiate their products in order to achieve above market returns.

3. Whether or not to shut down in the short run

When the price average is less than the average variable cost for every output level

5.What happens in the long run if losses persist

The firms will eventually exit from the market thus pushing price back up to the zero profit level.