Question

Explain why each of the following statements is false:

1. Market power enables a seller to charge a price that is higher than their marginal cost, and this is what makes it possible for sellers with market power (such as monopolists) to earn positive profits in the long run.

2. The amount of deadweight loss associated with underproduction by monopolistically competitive firms is likely to accurately measure the true loss in social welfare resulting from this market structure (relative to perfect competition).

Answer 1

a) False, its the barrier to entry in the market that allows the frims to earn a positive economic profit in the long run, if more firm are allowed to enter the market in the long run then the monopoly will not be able to make a profit in the long run. The answer is False.

b) False, there is deadweight loss in the market due to excess capacity in the market and that also allows the monopolistically competitive firms to produce different variety of goods, so when compared to the perfect competitive market the deadweight loss is not as big as it is given.