Question

1.All types of industry structures – competitive markets, monopolies, oligopolies, monopolistic competition, and cartels all strive to reach the point where MC = MR.  

• This statement is true.

• This statement is false.

• We do not have enough information to conclude if this is true or false.

• MR=MC has no practical applications and is just a theory.

2.Should non-profit firms be concerned with the MC=MR profit maximization formula?

• Non-profit firms do not need to calculate this formula and it will not provide any useful information for them.

• This formula can be useful in helping the non-profit to at least breakeven.     

• The MC=MR formula can only be used by for-profit firms.

• All of the statements above are false.

3.At the point where Marginal Cost just intersects the Average Total Cost, and assuming the price of the product or service is also at this level, then what is happening?

• The firm is earning a huge economic profit.

• You are breaking even with no economic profit whatsoever.

• The firm is enjoying economies of scale.

• The firm is dealing with diseconomies of scale.

4.Most firms belong to increasing cost industries. This means that:

• The long-run supply curve is upward sloping.  

• As the industry expands, more firms will enter the industry and will compete for the inputs that are necessary for production.  

• New firms entering the industry will bid up input resource prices (e.g. labor) and will therefore increase the per-unit costs.   

• All statements listed are true and correct.

Answer 1

1. The statement is False. Monopolies, oligopolies, monopolistic competition and cartels strive to reach MR = MC while the competitive markets strive to reach P = MC. This is because of the number of participants in the market and the type of products that are being sold in each type of market. The competitive markets have huge number of participants selling the same type of good or a homogeneous product while the other types of market structure have fewer participants and sell somewhat differentiated goods that are close substitute of each other and thus have some market power which they want to use to maximise profit and by reaching MR = MC.

2. The correct option is (D). The Non-profit firms aim at providing service to the people and their concern is not profit. Thus they don’t need to conform to any formula such as MR = MC . To breakeven Price to be compared with Average variable cost and not Mr with MC. MR = MC is not used by oligopoly depending on the number of firms and whether there is any dominant firm or not where the fringe firms take price as taken and doesn’t necessarily equate MR = MC.

3. The point where MC intersect ATC is the minimum point of ATC. P = ATC = MC. Then Profit = (P-ATC)*Q = 0. This is zero economic profit.

                            The break even is at P = AVC(average variable cost). Thus option (2) is incorrect.

With P = ATC = MC, the economy is in long run and exhibit economies of scale. Thus the correct option is (c).

4. The correct option is (D). reasons are also correct.