Which two of the following statements are true? I. A simple monopoly firm always earns super normal profit II. Sweezy’s kinked demand curve model is the best known model explaining relatively more satisfactory behaviour of oligopoly firm for price rigidity III. A perfectly competitive firm is price-taker IV. Firms under monopolistic competition earn only normal profits Choose the correct option from those below

The correct answer is: C. II and III

• Statement I is false. A simple monopoly firm does not always earn super normal profit. A monopoly firm is the only seller of a good or service in a market. It has a great deal of market power and can therefore charge a price above marginal cost. However, a monopoly firm may not always be able to earn super normal profit. This is because it may face competition from potential entrants into the market. If potential entrants see that the monopoly firm is earning super normal profit, they may enter the market and compete with the monopoly firm. This would drive down the price of the good or service and reduce the monopoly firm’s profits.
• Statement II is true. Sweezy’s kinked demand curve model is a model that explains the price rigidity of oligopoly firms. An oligopoly is a market structure in which there are a small number of firms. These firms interact strategically with each other and are aware of each other’s actions. The kinked demand curve model assumes that oligopoly firms are price-makers. This means that they can set the price of their goods or services. However, the model also assumes that oligopoly firms are afraid to change their prices. This is because if one firm lowers its price, the other firms in the market will also lower their prices. This would lead to a price war and reduce the profits of all the firms in the market. Therefore, oligopoly firms are more likely to keep their prices unchanged, even if their costs change.
• Statement III is true. A perfectly competitive firm is a firm that is a price-taker. This means that the firm has no control over the price of its goods or services. The price is determined by the market forces of supply and demand. The perfectly competitive firm will therefore produce the quantity of output at which marginal cost equals price. This will ensure that the firm is earning normal profits.
• Statement IV is false. Firms under monopolistic competition earn economic profits in the short run, but these profits will be competed away in the long run. Monopolistic competition is a market structure in which there are a large number of firms selling similar but not identical goods or services. The firms in a monopolistically competitive market have some market power, but they do not have as much market power as a monopoly firm. This is because there are a large number of firms in the market, so each firm has a small share of the market. The firms in a monopolistically competitive market are price-makers, but they have a downward-sloping demand curve. This means that they can increase their prices without losing all of their customers. However, the firms in a monopolistically competitive market will not be able to earn super normal profits in the long run. This is because new firms will enter the market if they see that the existing firms are earning super normal profits. The entry of new firms will increase the supply of goods or services in the market, which will drive down prices and reduce the profits of the existing firms.