perfect competition and monopoly questions please help

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User1674917
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Hi guys,
Been revising perfect competition and monopoly and wanted to ask some economists if they could answer these questions:
1.) why isn't profit maximised at MR>MC rather at MR=MC, surely having more MR means more profit?
2.) How does a perfectly competitive firm produce supernormal profit in the short run?
3.) Why can a perfectly competitive firm not enter or leave the market in the short run but can in the long run?
4.) In long run equilbruim for a perfectly competitive firm allows to only make the firm a normal profit. Why?
5.) How is a monopoly able to have supernormal profit in the long run & short run? (link with equilbruim)
6.) What is the main difference between revenue maximisation and profit maximisation?
7.) Why is the MR curve twice as steep as the AR curve in a monopoly?

Thank you.
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OrionMusicNet
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(Original post by star80)
Hi guys,
Been revising perfect competition and monopoly and wanted to ask some economists if they could answer these questions:
1.) why isn't profit maximised at MR>MC rather at MR=MC, surely having more MR means more profit?
2.) How does a perfectly competitive firm produce supernormal profit in the short run?
3.) Why can a perfectly competitive firm not enter or leave the market in the short run but can in the long run?
4.) In long run equilbruim for a perfectly competitive firm allows to only make the firm a normal profit. Why?
5.) How is a monopoly able to have supernormal profit in the long run & short run? (link with equilbruim)
6.) What is the main difference between revenue maximisation and profit maximisation?
7.) Why is the MR curve twice as steep as the AR curve in a monopoly?

Thank you.
1. You have to remember that MR is 'marginal' revenue. This means that you are essentially looking at the amount of revenue step by step (as output increases by individual units). If MR > MC then that means money will be added to the balance sheet, and so a firm will keep doing this until MR = MC as to go any further would result in money being taken off the balance sheet meaning that they would be going past the point of profit maximisation as any increases in output will just result in more money taken of the balance sheet.

2, 3 and 4. The reasoning behind this isn't as important as the diagram shows it well enough, however, I imagine its due to the fact that it takes time for new firms to get set up (e.g. build up supply, buying a factory etc...) and this can only be done in the long run. In the long run, due to no barriers to entry or exit, firms will be attracted to supernormal profits and so may enter the market leading to price falling (due to an increase in supply) to a level where firms in the market can only earn normal profits (you can find diagrams of this on google). Firms can also exit in the long run because losses cannot be sustained in the long run whilst a firm can survive them temporarily in the short run.

5. The monopoly is a price maker due to the huge barriers to entry and exit. The monopoly's supernormal profits won't be able to attract new firms simply due to the fact that firms find it to difficult to enter the market (e.g. intellectual property rights, huge start up costs, economies of scale of the monopoly). This allows monopolies to keep their supernormal profits.

6. Revenue maximisation occurs when MR = 0 (is touching the x axis in a monopoly diagram) and is about the amount of revenue brought in so it doesn't take into account the level of costs. Profit maximisation is about profit which include revenue and cost meaning that the firm will be attempting to have the biggest possible gap between revenue and costs, revenue maximisation ignores the level of costs.

7 would take forever to explain but I do have it explained in my OCR economics notes:
http://www.mediafire.com/download/l6...28Final%29.pdf
It's on page 16
Hope that helps.
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User1674917
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(Original post by orionmusicnet)
1. You have to remember that mr is 'marginal' revenue. This means that you are essentially looking at the amount of revenue step by step (as output increases by individual units). If mr > mc then that means money will be added to the balance sheet, and so a firm will keep doing this until mr = mc as to go any further would result in money being taken off the balance sheet meaning that they would be going past the point of profit maximisation as any increases in output will just result in more money taken of the balance sheet.

2, 3 and 4. The reasoning behind this isn't as important as the diagram shows it well enough, however, i imagine its due to the fact that it takes time for new firms to get set up (e.g. Build up supply, buying a factory etc...) and this can only be done in the long run. In the long run, due to no barriers to entry or exit, firms will be attracted to supernormal profits and so may enter the market leading to price falling (due to an increase in supply) to a level where firms in the market can only earn normal profits (you can find diagrams of this on google). Firms can also exit in the long run because losses cannot be sustained in the long run whilst a firm can survive them temporarily in the short run.

5. The monopoly is a price maker due to the huge barriers to entry and exit. The monopoly's supernormal profits won't be able to attract new firms simply due to the fact that firms find it to difficult to enter the market (e.g. Intellectual property rights, huge start up costs, economies of scale of the monopoly). This allows monopolies to keep their supernormal profits.

6. Revenue maximisation occurs when mr = 0 (is touching the x axis in a monopoly diagram) and is about the amount of revenue brought in so it doesn't take into account the level of costs. Profit maximisation is about profit which include revenue and cost meaning that the firm will be attempting to have the biggest possible gap between revenue and costs, revenue maximisation ignores the level of costs.

7 would take forever to explain but i do have it explained in my ocr economics notes:
http://www.mediafire.com/download/l6...28final%29.pdf
it's on page 16
hope that helps.
your awesome! Thanks!
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