Hey guys my Econ final is on Tuesday and I could use some help. These are 4 example questions true/false with explanation needed.
1. A monopolist will produce less and charge a higher price than a perfectly competitive industry.
2. Regardless of the type of price control, if it is effective it will reduce the quantity.
3. At maximum profit, a perfectly competitive firm will produce in the short-run even if it is losing money.
4. If demand is inelastic an increase in the price will cause a decrease in the firm's Total Revenues.
Thanks guys!
Take a shot, what do you think?
Hint, (T,T,T,T)
1. To determine if the statement is true or false, let's break it down and understand the concepts involved. A monopolist is a single seller in the market with no close substitutes, while a perfectly competitive industry consists of many small firms selling identical products. The monopolist has control over the supply and can set the price, whereas the price in a perfectly competitive industry is determined by the market forces of supply and demand.
A monopolist will typically produce less output than a perfectly competitive industry because they aim to maximize profits by restricting supply and charging higher prices. This is known as the monopolist's profit-maximizing behavior. So, the first statement is true.
2. This statement refers to price controls, which are government-imposed regulations on the prices of goods or services. Price controls can be in the form of price ceilings (maximum price) or price floors (minimum price), and their effectiveness varies depending on the market conditions.
If a price control is effective, it means that the regulated price is binding and has an impact on the market. In most cases, price controls tend to reduce the quantity of goods or services exchanged in the market. This happens because the regulated price often leads to a decrease in supply or an increase in demand, creating a shortage or surplus, respectively. So, regardless of the type of price control, if it is effective, it will tend to reduce the quantity. Therefore, the statement is true.
3. In the short run, perfectly competitive firms can continue producing even if they are making losses. This is because in the short run, firms have fixed costs that they cannot avoid, such as rent or loan payments. As long as the price covers their variable costs (costs that vary with the level of production), they will cover a portion of their fixed costs and minimize their losses.
However, it is important to note that in the long run, perfectly competitive firms will exit the market if they consistently make losses. In the long run, firms have the flexibility to adjust all their costs, including fixed costs. Therefore, the statement is false, as a perfectly competitive firm will not continue producing in the short run if it is losing money.
4. Elasticity of demand measures the responsiveness of quantity demanded to a change in price. If demand is inelastic, it means that the percentage change in quantity demanded is less than the percentage change in price. In other words, an increase in price will result in a proportionally smaller decrease in quantity demanded.
Total revenue is calculated by multiplying the price of a good or service by the quantity sold. If demand is inelastic and the price increases, the decrease in quantity demanded will not be significant enough to offset the increase in price. As a result, the firm's total revenues will increase. So, the statement is false.