Question

Determine if each of the following statements is True or False:

a. In the short-run, a perfectly competitive firm should always shut down when it makes a negative profit.
b. when a competitive markets becomes a monopoly, the monoplist charges a higer price than the previous market equilibrium price and produces a lower quantity than the previous market equilibrium quantity.
c. Perfect price discrimination occurs when a firm sells the same good or service at each consumer's willingness to pay.
d. A monoplistically competitive firm with a higher degree product differentiation enjoys higher willingness to pay.

Answer 1

a) False. It should shut down only when the market price falls below the average variable cost. It should continue to operate even when there are negative profits because even above the price is below the average total cost, it is above the average variable cost.

b) True. This is because when there is market power, demand function slopes down and this reduces the quantity produced due to a new condition where now P > MR while previously it was P = MR

c) True. Price discrimination is perfect when each consumer pays his or her maximum willingness to pay.

d) True. With differentiation in products, market demand becomes inelastic and so price charging ability improves.