Consider the following statements regarding the long run equilibrium in the monopolistic market. Code :
I. Firms are in no profit no loss situation.
II. There is no entry or exit of the firms.
Which among the above statements are true ? Answer from the code below :
Monopolistic Market Long Run Equilibrium
Understanding the conditions for long-run equilibrium is crucial for analyzing markets like monopolistic competition. The key characteristics are examined below.
Statement I Analysis: Zero Economic Profit
In the long run, firms operating in a monopolistically competitive market tend towards a state of zero economic profit. This is often described as a 'no profit, no loss' situation.
- This occurs because the market features relatively free entry and exit.
- If firms earn positive economic profits (Price > Average Total Cost), new firms enter, increasing competition. This entry shifts individual firms' demand curves leftward, reducing price and profit until profits are zero.
- Conversely, if firms experience economic losses (Price < Average Total Cost), some firms will exit the market. Exit reduces competition, shifting remaining firms' demand curves rightward, raising price and eliminating losses.
Therefore, the equilibrium condition requires Price = Average Total Cost (P = ATC).
Statement II Analysis: Stable Market Structure
The condition of no entry or exit directly follows from the profit situation. Equilibrium is achieved when there is no tendency for the number of firms in the market to change.
- As established, positive profits attract entry, and losses cause exit.
- Equilibrium prevails only when firms are making exactly zero economic profit, removing the incentive for either entry or exit.
Conclusion
Based on the analysis:
- Statement I is true: Firms break even (P = ATC) in the long run.
- Statement II is true: The absence of profit or loss means there is no entry or exit.
Both statements accurately represent the conditions for long-run equilibrium in a monopolistic market.
Important Questions from Price determination under different market forms
‘Oligopoly’ refers to:
Which of the following statements are true regarding price and output determination under perfect competition?
A. A firm is a price taker
B. In the long run, a firm is in equilibrium when its AR = MR = LAC = LMC
C. A firm is in equilibrium in the short run only when its AC = AR = MR = MC
D. A firm reaches its shut-down point when price goes below its AC
E. A firm fixes the price of its products when AR = MR
Choose thecorrectanswer from the options given below:
Which of the following statements regarding price and output determination under monopoly are correct?
A. A monopoly firm can fix its price anywhere along its demand curve
B. Even during short run when a monopoly firm earns normal profit, it produces less than its optimum capacity
C. The slope of monopoly's MR curve is twice the slope of its AR curve
D. Price discrimination is possible only when demand curves are identical in two markets
E. Equilibrium price of a monopolist is always higher than that of a perfectly competitive firm.
Choose thecorrectanswer from the options given below:
A price ceiling below the equilibrium price of a commodity leads to
A. Commodity glut in market
B. Shortage of commodity
C. Demand erosion
D. Black marketing
Choose the correct answer from the options given below:
Given below are two statements, one is labelled as Assertion A and the other is labelled as Reason R
Assertion A: An oligopolist firm cannot decide the price it wishes to charge as well as the quantity it wishes to sell, both at the same time.
Reason R: An oligopolist firm takes into consideration the competitor's actions and counter actions because of a strong interdependence among the competitive firms
In light of the above statements, choose the most appropriate answer form the options given below
