Question 1
Part 1
1.1 Describe the term externalities.
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1.2 What determines the optimum production level in a monopolistic competition?
1.3 Why is the demand curve of a firm in a perfect market horizontal?
1.4 How can the use of competition policy benefit consumers.
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1.1 Externalities refer to the unintended consequences of an economic activity that affect third parties who are not directly involved in the activity. These can be positive externalities where the third party benefits, or negative externalities where the third party is harmed.
1.2 The optimum production level in monopolistic competition is determined by the point where marginal cost equals marginal revenue. This is where the firm maximizes its profits.
1.3 The demand curve of a firm in a perfect market is horizontal because the firm is a price taker and cannot influence the market price. As such, it must accept the prevailing market price for its goods or services.
1.4 Competition policy can benefit consumers by promoting efficiency, innovation, and lower prices. By preventing monopolies and encouraging competition, consumers have more choices and businesses are incentivized to improve their products and services to attract customers. This ultimately leads to better outcomes for consumers.