micro problems

[aastha]

1)If the demand curve facing a monopolist is given by p=10q^1.5 then output sold by the monopolist
a: cannot be determined by maximum profits
b: is determined by maximizing profits
c: is determined by maximum profits provided the cost is constant.
d: is determined by maximum profits provided the cost is an increasing function of output.

2)The nature of the long run equilibrium for a monopolistically competitive firm differs from that of a perfectly competitive firm because of
a: the presence of supernormal profits
b: the presence of excess capacity
c: the equality between MR and MC
d: none of the above

[anon_econ]

i'm getting (a) for both. do u hv the correct answers?

[Chocolate Frog]

Answer to the first question should be (a) because MR is increasing in output, and even if cost is increasing in output, there's no guarantee that MC will ever exceed MR.

As for the second question, I think the only difference between long run equilibria of monopolistically competitive and perfectly competitive firms is the presence of excess capacity in the former. So, the answer to the second question should be (b).

[anon_econ]

Yeah u r right about the second one.

[neha.]

I think the answer for the first question should be "d" , 'cause if the cost function is an increasig function of output (it is linear or strictly concave),, we can determine the the level of output which maximizes the profit,,

in case of convex function too, profits can be maximized unless the two curves overlap.

For the second one, i think the answer is "b"

[Chocolate Frog]

No, Neha, it will not, in general, be possible to determine the profit maximising level of output in this case. The simplest (counter)example to illustrate my point would be a cost function which increases linearly with output, i.e. one with a constant marginal cost. MC and MR will be equal at some level, but since MR is increasing in output, it would pay the producer to continue producing more units.

[neha.]

yeah,,, my bad,,, u r rite ,, thanks:)

[SHIKHA]

@Chocolate Frog/ vasudha.....plz can u elaborate the reasoning for second ques.. i didnt get it..how it is 'b'???

[Chocolate Frog]

(a) is definitely wrong because in the long run, there're no supernormal profits in a monopolistically competitive environment because of free entry, just as in perfect competition.

(c) is wrong because even a competitive firm can be thought of as equating MR and MC; MR just happens to be constant at the market price level.

That leaves us with (b), which is true because the long run equilibrium of a monopolistically competitive firm is characterised by tangency of demand and average cost curves. Since output level typically lies to the left of the point of minimum average cost, monopolistic competition is said to have excess capacity because if there were fewer firms, each firm would be able to operate at a more efficient level of output.

[SHIKHA]

oh yes...got it thanks...