Chapter 9 Question 4

Chapter 9 – Question 4 Your Name Subject and section Professor’s name June 16, 2024 Indicate whether each of the following statements is true or false and explain why 1 A competitive firm that is incurring a loss should immediately cease operations. 1 False. 2 Explanation: A competitive firm incurring a loss should not necessarily cease operations immediately. In the short run, as long as the firm can cover its variable costs, it should continue to operate. This is because the firm still needs to pay its fixed costs regardless of whether it is operating or not. Suppose the product's sales revenue (price per unit) is higher than the average variable cost (AVC). In that case, the firm can cover its variable costs and contribute towards fixed costs, reducing overall losses. The firm should cease operations if the price falls below the minimum average variable cost, as it cannot cover even the variable costs, leading to larger losses if it continues to operate. 2 A pure monopoly does not have to worry about suffering losses because it has the power to set its prices at any level it desires 3 False. 4 Explanation: A pure monopoly has highly influenced control in setting its prices, but the extent of this act is limited by the demand for the product that it offers and its costs. Conversely, a monopoly will set the price that enhances its profit, and this is where MR equals MC. However, the monopolist may make losses if the cost structures are high relative to the revenues produced at the equilibrium price level. Other factors, such as economic conditions, are also responsible for situations where even a monopolistic firm may make a loss, and this is due to its power to set high prices in the market. 3 In the long run, firms operating in perfect and monopolistic competition will tend to earn regular profits. 5 True. 6 Explanation: In the long run, firms are absent in perfect competition and monopolistic competition because new firms enter the ma...