COLEGIO DE LA PURISIMA CONCEPCION

The School of the Archdiocese of Capiz

Roxas City

College of Business, Management and Accountancy

BA 1 – BASIC MICROECONOMICS
First Semester 2020-2021

Name: LIRA S. BALASABAS

Activity 9

1. How are costs different in the short run vs. the long run?
Answer:
Short run: Fixed costs are already paid and are unrecoverable.
Long run: Fixed costs have yet to be decided on and paid, and thus are not truly "fixed."

2. How does a competitive firm determine the quantity that maximizes profits?
Answer: A perfectly competitive firm must accept the price for its output as determined by the
product’s market demand and supply; it cannot choose the price it charges. Rather, the
perfectly competitive firm can choose to sell any quantity of output at exactly the same price.
This implies that the firm faces a perfectly elastic demand curve for its product: buyers are
willing to buy any number of units of output from the firm at the market price. When the
perfectly competitive firm chooses what quantity to produce, then this quantity—along with
the prices prevailing in the market for output and inputs—will determine the firm’s total
revenue, total costs, and ultimately, level of profits.

3. How do monopolies affect society’s well-being?

Answer:
 Monopoly - higher profit
Not a reduction of economic welfare
 Social loss = Deadweight loss
From the inefficiently low quantity of output
 Produces less than the socially efficient quantity of output

4. In what ways does monopolistic competition affect society’s welfare?

Answer:
 A way in which Monopolistic Competitive firms may be socially inefficient is that the
number of firms may not be ideal i.e. too many or too few due to free entry. 
 Whenever a new firm considers entering the market with a new product, it considers
only the profit it would make. Yet its entry could have 2 external effects:
 The products variety externality: Because consumers get some consumer surplus from
the introduction of a new product, entry of a new firm conveys a positive externality on
consumers.
  The business-stealing externality, because other firms lose customers and profits from
the entry of a new competitor, entry of a new firm imposes a negative externality on
existing firms.
 Depending on which externality is larger a monopolistic market could have either too
many or too little products.
 We can conclude that monopolistically competitive markets do not have all the
desirable welfare properties of perfectly competitive markets.

5. What outcomes are possible under oligopoly?

Answer: The possible outcomes for oligopoly are:
 Stable prices (e.g. through kinked demand curve) – firms concentrate on non-
price competition.
 Price wars (competitive oligopoly)
 Collusion- leading to higher prices.