ECON 1312 Homework Assignment #3: Perfect Competition and Monopoly

This homework assignment for ECON 1312 explores key concepts in microeconomics, focusing on market structures including perfect competition, monopoly, and monopolistic competition. It addresses questions about price-taking behavior, the relationship between firm and market demand, and profit maximization in perfectly competitive markets. The assignment delves into the characteristics of monopolies, including how they arise, price discrimination strategies, and the implications for output and pricing compared to perfect competition. Furthermore, it examines monopolistic competition, its characteristics, how firms compete, and the implications of product differentiation and selling costs on market efficiency. The solutions cover topics such as marginal cost, marginal revenue, market supply, and the impact of changes in market demand on output, price, and profit in both the short and long run. The assignment also explores the role of entry and exit in competitive markets, the impact of demand shifts, and the time frame's influence on the elasticity of supply. Finally, it examines the role of price discrimination, consumer surplus, and the efficiency of different market structures.

ECON 1312 Homework Assignment # 3
Chapter 12
1. Why is a firm in perfect competition a price taker?
ANSWER: Because a firm will sell only at the price that is decided by the market when
it is perfect competition so it is called a price takes.
2. In perfect competition, what is the relationship between the demand for the firm’s output
and the market demand?
ANSWER: Perfect competition is the relationship between demand for the firms
output and market demand
3. In perfect competition, why is a firm’s marginal revenue curve also the demand curve for
the firm’s output?
ANSWER: A firm’s marginal revenue curve also the demand curve for the firm’s
output because the firm’s marginal revenue is equals the market price.
4. What decisions must a firm make to maximize profit?
ANSWER: Firms must find out how to reduce production costs, how much to produce,
and weather to enter the market or not.

5. Why does a firm in perfect competition produce the quantity at which marginal cost equals
price?
Answer: To prevent losses as they have no control over the prices, they produce the
quantity where the marginal cost equals the price to have economic profit which is
cost= selling price.
6. What is the lowest price at which a firm produces an output?
ANSWER: The lowest price that a firm produces is when the average total costs are
equal to the market selling price
7. What is the relationship between a firm’s supply curve, its marginal cost curve, and its
average variable cost curve?
ANSWER: Profit maximizing output relationship.
8. How do we derive the short-run market supply curve in perfect competition?
ANSWER: Quantity supplied by the market at a given price is the sum of the
quantities supplied by all the firms in the market in that price.
9. In perfect competition, when market demand increases, explain how the price of the good
and the output and profit of each firm changes in the short-run.
ANSWER: If market demand increases, the price of the goods rises, output and profit also
rises.
10. In perfect competition, when the market demand decreases, explain how the price of the
good and the output and profit of each firm changes in the short-run.
ANSWER: Price falls and firms decreases production as well as profit falls.

11. What triggers entry in a competitive market? Describe the process that ends further entry.
ANSWER: New firms enter a market in which existing firms are making an economic
profit; the process that ends further entry is a zero economic profit.
12. What triggers exit in a competitive market? Describe the process that ends further exit.
ANSWER: Exit comes when firms are incurring an economic loss. The process that ends
further entry is a zero economic profit.
13. Describe the course of events in a competitive market following a permanent increase in
demand. What happens to output, price, and economic profit in the short-run and in the
long-run?
ANSWER: The market price falls and the quantity supplied by the market decreases.
The market price is below the firm’s minimum average total cost, the firm incurs an
economic loss.
14. Describe the course of events in a competitive market following a permanent decrease in
demand. What happens to output, price, and economic profit in the short-run and in the
long-run?
ANSWER: The market price becomes higher and also the quantity supplied by the market.
The market price is high and the firm’s minimum average total cost I also.
15. How does the time frame over which a supply decision is made influence the elasticity of
supply? Explain your answer.
ANSWER: Comparing marginal revenue and with marginal cost. As output increases,
the firm’s marginal revenue is constant but its marginal cost eventually increases.

Chapter 13
1. How does monopoly arise?
2. How does a natural monopoly differ from a legal monopoly?
3. Distinguish between a price-discriminating monopoly and a single-price monopoly.
4. What is the relationship between marginal cost and marginal revenue when a single-price
monopoly maximizes profit?
5. How does a single-price monopoly determine the price it will charge its customers?
6. What is the relationship between price, marginal revenue, and marginal cost when a single-
price monopoly is maximizing profit?
7. Why can a monopoly make a positive economic profit even in the long-run?
8. Why does a single-price monopoly produce a smaller output and charge more than the price
that would prevail if the market were perfectly competitive?
9. How does a monopoly transfer consumer surplus to itself?
10. Why is a single-price monopoly inefficient?
11. What is price discrimination and how is it used to increase a monopoly’s profit?
12. Explain how consumer surplus changes when a monopoly price discriminates.
13. Explain how consumer surplus, economic profit, and output change when a monopoly
perfectly discriminates.

14. What are some of the ways that real-world airlines price discriminate?
Chapter 14
1. What are the distinguishing characteristics of monopolistic competition?
2. How do firms in monopolistic competition compete?
3. How does a firm in monopolistic competition decide how much to produce and at what
price to offer its product for sale?
4. Why can a firm in monopolistic competition make an economic profit only in the short run?
5. Why do firms in monopolistic competition operate with excess capacity?
6. Why is there a price markup over marginal cost in monopolistic competition?
7. Is monopolistic competition efficient?
8. How, other than by adjusting price, do firms in monopolistic competition compete?
9. Why might product innovation and development be efficient and why might be inefficient?
10. How do selling costs influence a firm’s cost curves and its average total cost?
11. How does advertising influence demand?
12. Are advertising and brand names efficient?