Question

A Assumimg a firm is operating under perfect competion with many producers and buyers fot its product, when should it consider shutting down in the long run? Justify your answer

  

B Assuming that a firm is operating under monopolistic competition with many producers and buyers for its product, under what conditions will that firm achive profit-maximization. Justify your answer.

Answer 1

A) a firm under perfect competition should shut down in the long run when they incur losses. In the long run there is no fixed cost and there are free entry and exit and firm would want to exit if they are incurring losses.

B) under monopolistic competition there are many firms that produce differentiated goods which give them certain market power to change price higher than marginal cost. Thus the firms maximise profit when they produce at the level where marginal revenue is equal to marginal cost. Changing output level will only reduce profit.