Instructions
Type all your answers in a single Word document. Use Times New Roman 12 point font and double space your answers.
Answer all of the following five questions. Try to write at least one page, double spaced, for each question. You can copy and paste the text below into your document for reference or print out the page in your web browser. Questions should be clearly labelled in your submission. Each question is worth 20 marks.
- Explain fully why all firms in monopolistic competition must earn only normal profits in long run equilibrium. What are the three types of possible short run equilibrium in monopolistic competition? What are the conditions for each type in terms of price and ATC?
- Explain fully why perfectly competitive firms and monopolies maximize profits by choosing the quantity where MR = MC. Explain why the profit maximizing price of the monopoly can be higher or lower than the profit maximizing price for perfect competition.
- Explain fully the law of diminishing returns. Does this occur in the short run or the long run? How does the law of diminishing returns explain the shapes of the MP, AP, MC and AVC curves?
- How is accounting profit different from economic profit? Provide one example of explicit cost and one example of implicit cost. How is implicit cost measured? Is normal profit included or excluded from total cost as measured by economists? Will a firm shut down if it is making only normal profit?
- Explain fully why the short-run supply curve always has a positive slope but the long run supply curve can have a positive or negative slope. Assuming that the long run supply curve has a negative slope what happens to the equilibrium price in the short run and in the long run if demand for the product increases.