Q. How much loss a firm can bear in the short run?
Ans:- A firm can bear losses up to its total fixed cost in the short run.
Q. The firms are earning abnormal profits. Will the number of firms in the industry change?
Ans:- If firms are getting abnormal profit new firms will enter the industry.
Q. If firms are making abnormal losses will the number of firms in the industry change?
Ans:- When firms are suffering losses, the number of firms in the industry will decrease as some firms may exit from the industry.
Q. Why is demand curve facing a monopolistic competition firm likely to be more elastic?
Ans:- In monopolistic competition market the demand curve of a firm is likely to be more elastic, the reason behind this is that all the firm in the industry produce close substitute of each other. If close substitute of any good is available in the market then elasticity of demand is very high because whenever there is a hike in price the consumer will shift to its substitutes. That is why a firm’s demand curve under monopolistic competition is more elastic.
Q. Explain how the efficiency may increase if two firms merge.
Ans:- i) When two firms merge then there combined efforts and efficiency brings more output to the firm. Increase in the sale of output and economies of scale can be availed. It leads to division of labour and can get advantage of the specialization. Use of better and advanced technology saves the cost of production.