Question

these are statements comparing monopoly with perfect competition. which of the following statements is/are false? a a perfectly competitive industry faces a horizontal straight line demand curve whereas a monopoly faces a downward sloping demand curve. a perfectly competitive firm faces a small fraction of the industry demand curve whereas a monopoly faces the entire market demand curve. a perfectly competitive firm can only set quantities; a monopoly can set both price and quantity, although once it chooses a price (quantity), the other variable, quantity (price), is determined by the demand curve it faces. a perfectly competitive equilibrium is efficient; a monopoly equilibrium (single price monopolist) is inefficient. a perfectly competitive firm necessarily earns zero economic profit in a long run equilibrium; a monopoly typically earns a super-normal profit in a long run equilibrium.

Answer 1

The question includes incorrect assertions about the capabilities of perfectly competitive firms and monopolies in setting price and quantity. A perfectly competitive firm is a price taker and cannot set either price or quantity, while a monopoly can choose one or the other, not both, as it faces the entire market demand curve. Perfect competition can lead to zero economic profits in the long run, while monopolies can earn super-normal profits.

Step-by-step explanation:

In economic theory, a perfectly competitive firm faces a perfectly elastic demand curve, meaning it has no control over the market price and can sell any amount of goods at the prevailing market price. Conversely, a monopoly faces the entire market demand curve, which is downward sloping; thus, if the monopolist wants to sell more, it must lower its price. Some of the statements made in the question contain inaccuracies:

• The statement that a perfectly competitive firm can only set quantities is inaccurate because the firm cannot set quantities either; it is a price taker, which means it accepts the market price and produces where its marginal cost equals the market price.
• The assumption that a monopoly can set both price and quantity is misleading because a monopoly selects a point on the demand curve by setting either the price or quantity, but not both independently. After choosing one, the other is determined by the demand curve it faces.

Correctly stated, a perfectly competitive firm earns zero economic profit in the long run due to free entry and exit in the market while a monopoly can earn a super-normal profit if there are no threats to its market power.