For the following characteristic say whether it describes a perfectly competitive firm, a monopolistically competitive firm, monopoly firm, or neither.
a. Has marginal revenue less than price. I would think this would be neither.
b. Produces at minimum of average total cost in the long run. I would think that it would be a perfectly competitive firm.
a) MR < price is typical for a monopoly or monopolistically competitive firm. Draw a graph of a monopolist.
b) correct.
Thanks for the help.
a. To determine which type of firm has marginal revenue less than price, we need to consider the behavior of different market structures.
In a perfectly competitive market, the individual firm is a price taker, meaning that it has no control over the price and is forced to sell its output at the prevailing market price. As a result, the marginal revenue (MR) for a perfectly competitive firm is equal to the price of the product. Therefore, a perfectly competitive firm will not have marginal revenue less than price.
In a monopolistically competitive market, firms have some degree of market power and can set their own prices to some extent. However, they still face competition from other firms, so their marginal revenue may be less than the price but not significantly lower. Therefore, it is possible for a monopolistically competitive firm to have marginal revenue less than the price.
In a monopoly market, there is only one firm that controls the entire market and has significant market power. The monopolist can set its own price based on the demand for the product. Therefore, a monopoly firm is likely to have marginal revenue less than the price.
Based on this analysis, the characteristic of having marginal revenue less than price could be found in both a monopolistically competitive firm and a monopoly firm. Therefore, the correct answer is neither.
b. The characteristic of producing at the minimum of average total cost (ATC) in the long run is associated with perfectly competitive firms. In the long run, perfectly competitive firms are able to optimize their production and minimize costs by adjusting their inputs and adopting the most efficient production methods. As a result, they produce at the minimum point of the long-run average total cost (LRATC) curve, which is where LRATC is at its lowest.
Monopolistic and monopoly firms, on the other hand, do not necessarily produce at the minimum of average total cost in the long run because they may have some degree of market power that allows them to charge higher prices and operate with less efficiency. Therefore, the correct answer for this characteristic is a perfectly competitive firm.