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characteristics of monopolistic competition and oligopoly

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Question #1:

discuss "shut-down" condition for a competitive firm.
The condition for shut-down is when P = AVC.
Explain it.
Does the firm make zero profit at that point or what?
How different is the point vis-a-vis a break-even point in terms of profit?

Question #2:

Describe the major characteristics of monopolistic competition and oligopoly.

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Solution Summary

The characteristics of monopolistic competition and oligopoly are noted.

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Question 1
The condition for shut-down is when the price is equal or smaller than the average variable costs. Let's see why. First of all, notice that in the short run, fixed costs are unavoidable; they will have to be paid either if the firm shuts down or if it keeps operating. So the decision of whether the company should shut down or not is independent of fixed costs. Now let's see why price has to be higher than average variable cost in order for it to keep operating. If price is higher than AVC, then total revenue (price times quantity) is higher than total variable costs (AVC times quantity). This means that in this case, the revenue covers the variable cost and maybe some of the fixed costs, which we said are unavoidable. Therefore, the firm ...

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