Mba micro exam 20121 econ 6095 803

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MBA Economic Analysis for Decision Makers

Microeconomics/International Trade

Take Home Exam

Spring 2021

Dr. Snyder

Student: Rose Diagne

1. Market Structure (65 points)

A. Graph and discuss a comparison of the short-run and long-run profits, price,

quantity, MR and MC of a Monopoly and a PC firm. Which type of firm is more

efficient and why? (30 points)

Answer A

Short run

Perfect competition

In short run, there are both variable cost and fixed cost; thus, a firm in short-run

perfect competition faces both average variable cost (AVC) and average total cost (ATC).

In figure 1, the gap between ATC and AVC curve represents the average fixed cost. Now,

a firm in perfect competition market earns zero economic profit in short run. However, if

the firm earns positive economic profit in the short run, then due to free entry and exit in

the market, this profit reduces zero economic profit again in the long run. In this case, it

is assumed the firm is earning zero economic profit. In short-run, equilibrium quantity

QC is determined by the intersection point between MR and MC. Here marginal revenue

is constant as price do not change with demand. On the other hand, equilibrium price PC

is determined by the point where D = MC. It should be noted that in perfect competition,

firms are price taker and thus demand curve is horizontal. This indicates in short-run

perfect competition price equals marginal cost (Schiller ).

Figure 1: Short-run perfect competition

Monopoly

In short run, a monopoly firm decides its profit maximization output by equating

marginal cost to marginal revenue. In monopoly, marginal revenue and demand curve is

downward sloping. However, marginal revenue lies below the demand curve as the rise

in demand price falls, and thus, marginal revenue falls. In monopoly, equilibrium price is

determined by equation price to demand at the profit-maximizing equilibrium output.

Here, price is higher than average total cost, and thus a monopoly firm earns a super

normal profit. Figure 2 represents a monopoly firm in short run where QM is equilibrium

quantity and PM is equilibrium price. MR represents marginal revenue curve, and MC

represents marginal cost curve (Schiller , The Economy Today).

Figure 2: Monopoly in short run

Comparison

If short-run monopoly firm and perfectly competitive firm are compared, then it

can be found that price in monopoly is higher, but quantity is higher in perfect

competition. Marginal cost seems similar in firm in both markets, but marginal revenue is

constant in perfect competition but falling in monopoly. Firm in perfect competition

earns zero economic profit, but monopoly firm earns super normal profit (Shiller).

Long run

Perfect competition

In long run, perfect competition there is no fixed cost, and thus variable cost

equals total cost. The equilibrium price and quantity is determined in similar way as in

short run but the price is always equal to minimum average cost in long run unlike short

run. In long run, equilibrium price is given by and PC* and equilibrium quantity by QM*

as shown in figure 3. In long run firm, earn zero economic profit (Schiller ).

Figure 3: Long run perfect competition

Monopoly

In long run monopoly price and quantity does not change, and it remains the same

as it was in short run. The firm in monopoly earns supernormal profit in any

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MBA Economic Analysis for Decision Makers Microeconomics/International Trade Take Home Exam Spring 2021 Dr. Snyder Student: Rose Diagne 1. Market Structure (65 points) A. Graph and discuss a comparison of the short-run and long-run profits, price, quantity, MR and MC of a Monopoly and a PC firm. Which type of firm is more efficient and why? (30 points) Answer A Short run Perfect competition In short run, there are both variable cost and fixed cost; thus, a firm in short-run perfect competition faces both average variable cost (AVC) and average total cost (ATC). In figure 1, the gap between ATC and AVC curve represents the average fixed cost. Now, a firm in perfect competition market earns zero economic profit in short run. However, if the firm earns positive economic profit in the short run, then due to free entry and exit in the market, this profit reduces zero economic profit again in the long run. In this case, it is assumed the firm is earning zero economic profit. In short-run, equilibrium quantity QC is determined by the intersection point between MR and MC. Here marginal revenue is constant as price do not change with demand. On the other hand, equilibrium price PC is determined by the point where D = MC. It should be noted that in perfect competition, firms are price taker and thus demand curve is horizontal. This indicates in short-run perfect competition price equals marginal cost (Schiller ). Figure 1: Short-run perfect competition Monopoly In short run, a monop ...
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