(a) Does a monopolistically competitive firm have an incentive to produce at the level of output that minimizes the average total cost at the long run equilibrium? Explain with a diagram. (b) Suppose CLP Holdings Limited is a natural monopolist with constant marginal cost. Draw a diagram to indicate the profit-maximizing level of output, the profit-maximizing price, and the size of the profit. If the government wants to increase the market efficiency through price regulation, would you suggest the government setting the price equal to the firm’s marginal cost or its average total cost? Explain in detail with the diagram in part (i).

The basic characteristics of Monopolistic competition are – Differentiated products, many firms, and…

Answered: Does a monopolistically competitive…

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter14: Monopoly

Section: Chapter Questions

Problem 14.3P

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(a) Does a monopolistically competitive firm have an incentive to produce at the level of output that minimizes the average total cost at the long run equilibrium? Explain with a diagram.

(b) Suppose CLP Holdings Limited is a natural monopolist with constant marginal cost.

Draw a diagram to indicate the profit-maximizing level of output, the profit-maximizing price, and the size of the profit.

If the government wants to increase the market efficiency through price regulation, would you suggest the government setting the price equal to the firm’s marginal cost or its average total cost? Explain in detail with the diagram in part (i).

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

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