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Consider the following Companies A to E where each is an individual firm operating under a specific market structure
Consider the following Companies A to E where each is an individual firm operating under a specific market structure. Company A B ? D E Marginal Average Average Marginal cost cost revenue revenue 10 10 10 10 12 9 12 12 15 18 20 15 9 14 20 14 20 20 10 25 (1) State which company has a short run equilibrium output that may be that of a profit maximising monopolist ! [1] Give ALL the companies that are making excess profits. [1] (111) Give ALL the companies that could expand their output and increase their profits. [2] (iv) Give ALL the companies that could be operating in a perfectly competitive environment.
Expert Solution
(1) In the short run a firm is a profit maximizing monopolist if MR=MC.So companies A,B and C may possibly be profit maximizing monopolists.
(2) Firms which are making excess or abnormal profits are those which dont have a normal profit or exceeds normal profit. Normal profit is given by AR=ATC ie average revenue=average total cost. A and E have normal profits.Firms B,C and D have excess profits.
(3) In a monopoly, if the monopoly produces a lower quantity, then there is MR>MC at those levels. Firm D has MR>MC.Firm D can increase profit by expanding output.
(4) In a perfectly competiotive environment the profit maximizing for a perfectly competitive firm is at MR=MC. A,B and C are in a perfectly competitive environment.
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