Question 1. Indicate whether each of the following statements is true or false and explain why.
a. A competitive firm that is incurring a loss should immediately cease operations.
b. A pure monopoly does not have to worry about suffering loses because it has the power to set its prices at any level it desires.
c. In the long run, firms operating in perfect competition and monopolistic competition will tend to earn normal profits.
d. Assuming a linear demand curve, a firm that wants to maximize its revenue will charge a lower price than a firm that wants to maximize its profits.
e. If P>AVC, a firm's total fixed cost will be greater than its loss.
f. When a firm is able to set its price, its price will always be less than its MR.
g. A monopoly will always earn economic profit because it is able to set any price that it wants to.
Question 2. The demand and cost function for a company is estimated to be as follows:
P = 100 - 8Q
TC = 50 + 80Q - 100Q2 + 0.6Q3
a. What price should the company charge if it wants to maximize its profits in the short run?
b. What price should it charge if it wants to maximize its revenue in the short run?
c. Suppose the company lacks confidence in the accuracy of cost estimated expressed in a cubic equation and simply wants to use linear approximation. Suggest linear representation of this cubic equation. What difference would it make on the recommended profit-maximizing and revenue-maximizing prices?
Question 3. In the short run, firms that seek to maximize their market share will tend to charge a lower price for their products than firms that seek to maximize their profit. Do you agree with this statement? Explain.