Question

Indicate whether each of the following statements is true or false and explain why.

1. A competitive firm that is incurring a loss should immediately cease operations.
2. A pure monopoly does not have to worry about suffering losses because it has the power to set its prices at any level it desires.
3. In the long run, firms operating in perfect competition and monopolistic competition will tend to earn normal profits.
4. Assuming a linear demand curve, a firm that wants to maximize its revenue will charge lower price than a firm that wants to maximize its profits.
5. If P > AVC, a firm's total fixed cost will be greater than its loss.
6. When a firm is able to set its price, its price will always be less than its MR.
7. A monopoly will always earn economic profit because it is able to set any price that it wants to.

Answer 1

A. False. It is still beneficial for the firm to produce in short run when firm incur an economic loss in short run. When AvC<price<AC then firm should produce in short run.

b. False. Monopoly can’t always earn economic profit because it can set price but not quantity. It can set only one either price or quantity

c. True. Due to free entry and exit, all firms in perfect and monopolistic competition, earns only normal profit.

d.true when MC>0 because profit is maximised when MR=MC and revenue is maximised when MR=0

e.true

f.false. Price is always greater than MR.

g.false