Question

Indicate the statement is true or false and explain why.

1. If the government gives a subsidy of $5 for each unit of output produced to firms in a competive industry, output will increase and deadweight loss will increase.

2. Common property problems which have led to the near extinction of whales are easily solved by government intervention.

3.Firms in monopolistic competition must earn zero economic profits in the long run.

Answer 1

1) False. Output will increase but deadweight loss will not increase because there is no deadweight loss before any subsidy.

2) True because when government intervenes and determines the property rights, there is no over exploitation of animal species

3) True because there is free entry and exit which allows new firms to enter when short run has positive economic profits and allow old firms to leave when short run has negative economic profits resulting in zero economic profits in long run.