Session 5: Economics: Market Structure and Macroeconomic Analysis
Reading 20: Monopolistic Competition and Oligopoly
LOS c: Compare and contrast monopolistic competition and perfect competition.
Which of the following statements about price takers and price searchers is most accurate?
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A) |
In the long run, both price takers and price searchers maximize profits at the quantity corresponding to the minimum point on the average total cost curve. | |
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B) |
Price takers maximize profits at the point price = marginal revenue = marginal cost. | |
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C) |
In the long run, both price takers and price searchers will have zero economic profits. | |
Because price takers face a horizontal demand curve, they must take price as given and thus maximize profits when P = MR = MC.
The other statements are false. Although firms engaged in pure competition (price takers) maximize profits at the quantity corresponding to the minimum point on the average total cost curve (ATC) (in the long run), this is not necessarily true for price searchers. Price searchers face a downward-sloping demand curve. They produce at the quantity MR = MC and take price from the demand curve. The demand curve may be above the ATC curve. The potential allocative inefficiency of a price searcher engaged in monopolistic competition includes the social cost of not producing where P = MC. This potential allocative inefficiency may be outweighed by the benefits of product diversity. Some price searchers, (monopolists, for example), can earn positive economic profits in the long run.
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发表于 2011-3-8 15:46
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