Answer to Question #191311 in Economics for Amirun

Question

1.A perfect competitive firm earns abnormal profit in the short run,what happens in the long run?

A.it continues to enjoy the abnormal profit and blocks other firms from stealing its profit.

B.its abnormal profit shrinks as new firms join the industry.

C.its abnormal profit increases as it invests on ways to differentiate the product.

D.its abnormal profit increases as it invests on ways to monopolise the market.

2.A perfect competitive firm faces marginal cost that is RM10 when it produces 100 units.The market price is rm8.What should it do?

A.increases output and sells at a higher price.

B.Decreases output and sells at a higher price.

C.Increases output and sells at the same price

D.Decreases output and sells at the same price.

Answer 1

1) The correct answer is B) its abnormal profit shrinks as new firms join the industry.

2) In this case $MC>MR$ (MC=RM100, MR=RM8). Since the firm's profit-maximizing level of output occurs when $MR=MC$, the firm should decreases output and sells at the same (market) price. Therefore, the correct answer is D) Decreases output and sells at the same price.