Hey just needed some pointers on the following questions.
True or False? Explain..
1. As long as the firm has to pay for an input, it would be wasteful not to use all input services purchased?
2. A profit-maximising competitive firm will never produce in the region
where average variable cost is declining.
3. A monopolist is best off operating on the inelastic portion of the demand
curve, where it can increase its price without losing many customers.
4. A monopolist attempts to maximise the difference between price and
average cost.
Thanks Guys!
1. Many goods have "secondary" markets, where an unused item is re-sold to somebody else. Further, many items are purchased by speculators in active futures markets. Thes speculators have no intention of using a particular purchase.
2. In a competitive market, price=marginal revenue; what is the shape of the demand curve faced by a firm? A competitive firm will produce where MC=MR, (and MC is rising). What can you say about marginal costs when average variable costs are falling. That is, can marginal costs be rising when average costs are falling? (hint: yes).
3. Use a linear example of a demand line (and thus a linear marginal revenue line) faced by a monopolist. Will the monopolist ever operate in the bottom right area of the demand curve? (hint: no) Calculate an elasticity in an area that is in the top left portion of the demand curve. Is the elasticity elastic or inelastic?
4) a monpolist, like all firms, maximizes profits by operating where MC=MR.
1. The statement is false. It is not wasteful for a firm to not use all input services purchased as there are various factors to consider such as market demand, production capacity, and efficiency. Just because a firm has paid for an input does not necessarily mean it should use all of it. For example, if there is no demand for the product or if using all the input would lead to inefficiencies or excess inventory, it would be more prudent for the firm to use only a portion of the input.
2. The statement is false. A profit-maximizing competitive firm will produce where marginal cost (MC) equals marginal revenue (MR), regardless of the region where average variable cost (AVC) is declining. The shape of the demand curve faced by a firm in a competitive market is usually downward-sloping. The firm will produce as long as the price it receives (which is equal to the marginal revenue) is greater than or equal to the marginal cost. The declining region of the AVC curve does not determine the firm's production decision.
3. The statement is true. A monopolist is best off operating on the inelastic portion of the demand curve, where it can increase its price without losing many customers. Elasticity measures the responsiveness of quantity demanded to a change in price. In the top left portion of the demand curve, where elasticity is low (inelastic), a monopolist can raise prices without experiencing a significant decrease in demand. However, a monopolist cannot operate in the bottom right area of the demand curve (where demand is highly elastic) because any increase in price would lead to a substantial loss of customers.
4. The statement is true. A monopolist attempts to maximize the difference between price and average cost in order to maximize its profits. The monopolist will set its output level where marginal cost (MC) equals marginal revenue (MR), just like any profit-maximizing firm. By operating at this point, the monopolist aims to have a price higher than average cost, which allows it to earn higher-than-average profits.