Goodday
I would like to find out whether the following statements are true:
The equilibrium of the firm and the equilibrium of the industry are the same in the short run as well as the long run.
In the short run, the firm is in equilibrium when MC=MR=P
When the industry is in equilibrium, the firm will make normal profit only.
A monopolist can set its quantities sold and the price of the product independent of each other
Good day!
To determine whether the statements are true or false, let's go through each one and explain how to evaluate them:
1. The equilibrium of the firm and the equilibrium of the industry are the same in the short run as well as the long run.
To evaluate this statement, we need to understand the difference between the short run and the long run. In the short run, firms have some fixed inputs, such as capital or technology, that they cannot adjust. However, in the long run, firms have the flexibility to adjust all inputs.
Therefore, in the short run, the equilibrium of the firm and the equilibrium of the industry can be different. For example, in a perfectly competitive market, the industry may have multiple firms, some of which might be making profits, while others might be incurring losses. On the other hand, in the long run, when firms can adjust their inputs, all firms will be operating at their efficient scale, resulting in zero economic profits for the entire industry.
Thus, the statement is false.
2. In the short run, the firm is in equilibrium when MC=MR=P.
To evaluate this statement, we need to understand the concepts of marginal cost (MC) and marginal revenue (MR) and how they relate to equilibrium. Marginal cost represents the additional cost incurred by a firm when producing one more unit of output. Marginal revenue represents the additional revenue the firm earns from selling one more unit of output. Equilibrium occurs when the firm maximizes its profits.
In the short run, the firm maximizes its profits by producing where marginal cost equals marginal revenue (MC=MR), but this is not sufficient. To be in equilibrium, the price (P) also needs to be determined. The firm will produce the quantity where MC=MR as long as MC is less than or equal to the price (MC<=P), which allows the firm to cover variable costs and some portion of fixed costs.
So, the correct statement for short-run equilibrium is: The firm is in equilibrium when MC=MR and MC<=P.
Hence, the statement is partly true.
3. When the industry is in equilibrium, the firm will make normal profit only.
To evaluate this statement, we need to understand the concept of normal profit. Normal profit refers to the minimum level of profit required to keep an entrepreneur in the business. It is the opportunity cost of the resources employed in the firm.
In a perfectly competitive market in the long run, firms can enter or exit the industry based on profits. If firms are making above-normal profits, it attracts new firms, which increases competition and reduces prices until all firms earn only normal profits. Similarly, if firms are making losses, some firms will exit, reducing competition and allowing the remaining firms to earn at least normal profits. In this long-run equilibrium, firms earn only normal profits, which is zero economic profit.
Therefore, the statement is true.
4. A monopolist can set its quantities sold and the price of the product independent of each other.
To evaluate this statement, we need to understand the nature of a monopolistic market. A monopolist is a single seller in the market and has control over the entire supply of the product. Unlike competitive markets, a monopolist can influence the price by adjusting the quantity it supplies.
A monopolist's profit-maximizing strategy involves producing the quantity of output where marginal revenue (MR) equals marginal cost (MC). However, to determine the price, the monopolist needs to consider the relationship between the quantity produced and the market demand curve. The monopolist sets the price based on the market demand elasticity, aiming to maximize profits.
Therefore, the quantity sold and the price of the product are not independent in a monopolistic market.
Hence, the statement is false.
I hope this helps in evaluating the given statements. If you have any more questions, feel free to ask!