Microeconomics question

Question

1. Analyze how barriers to entry lead to less output than perfect competition and why price is above marginal cost: 

Answer 1

Since there are barriers to entry, firms cannot enter the market meaning that fewer goods can be produced - there are fewer producers to make them - which is why there is decreased output than in perfect competition where there are no barriers to entry. Price would be above marginal cost when there are barriers because producers can charge higher prices. They charge the price people are willing and able to pay (the demand curve). They are also able to keep profits in the long run since firms cannot enter which allows them to maintain the higher price. In perfect competition, firms break even in the long run since whenever there is a profit, producers enter the market. The increase in supply drives prices down until the firm is breaking even.