Question

Which of the following statements is (are) correct?
(x) Selling a good at a price where the demand curve intersects the marginal cost curve will guarantee that the firm will not earn losses.
(y) A profit-maximizing perfect competitor will produce the level of output at which price is equal to marginal cost, but the typical profit-maximizing monopolistic competitor will not.
(z) Selling a good at a price where the demand curve intersects the marginal cost curve is consistent with the market solution for competitive firms and is consistent with the socially optimal level of output, but, it is not consistent with the market solution for monopolistic competitive firms.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

Which of the following statements is (are) correct about firms in a monopolistically competitive market?
(x) In the short run, if the price is above average total cost in, then the firm makes profits.
(y) If firms are making economic losses, then some firms are encouraged to exit the market in the long run.
(z) If firms are earning economic profits in the short run, then, in the long run, new firms will enter and existing firms will lose customers to the new entrants.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (y) only

When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium,
(x) marginal cost is falling since an increase in production would reduce average total cost.
(y) the firm operates at excess capacity since an increase in production would reduce average total cost.
(z) marginal revenue equals marginal cost, however, price exceeds marginal cost since price is greater than marginal revenue.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Answer 1

Answer : 1) The answer is option D.

For perfectly competitive firm the profit-maximizing condition is, Price = Marginal Cost. But for monopolistically competitive firm the profit-maximizing condition is, Marginal Revenue = Marginal Cost. Perfectly competitive firm's profit maximizing output level is a socially optimal output level. But monopolistically competitive firm's profit maximizing output level is not a socially optimal output level. As statements (y) and (z) are correct, hence the answer is option D.

2) The answer is option A.

A monopolistically competitive firm earn profit if the price is higher than the average total cost. In long run if firms earn loss then some firms exit from the market. If monopolistically competitive firm earn profit in short-run then many new firms enter into the market in long-run. As a result, existing firms lose their customers to new firms. As statements (x), (y) and (z) are correct, hence the answer is option A.

3) The answer is option E.

For monopolistically competitive firm the profit-maximizing condition is, Marginal Revenue = Marginal Cost. The monopolistically competitive firms charge that price level which is greater than marginal revenue. As only the statement (z) is correct hence the answer is option E.