Mbeya cement company, which has a rising short-run marginal cost curve is currently
operating at a loss. Mbeya cement company'schief economist says that if the price rises a
little, the output should not be increased because, if its marginal cost would rise and the
company would end up with a bigger loss on a higher volume. Should the chief executive
officer of Mbeya cement company listen to the chief economist?Why or why not
NB: Your explanations should be supposed with a graph for more detail. (5marks)
2.Economist claims that the equilibrium position of each firm in a perfectlycompetitive
industry the equilibrium can be atthepoint where D=P=MR=AR. At that point,you can
notice that the equilibrium market price, average revenue per unit is exactly equal to the
average cost per unit.
This means that AR*Q is exactly equal to AC*Q which means that TR is the same as TC.
Since cost and revenue are the same, this means that there isno profit. so why would any
producer stay in business if there isno profit to be gained from doing so?
NB: Your explanations should be supposed with a graph for more deta
Kasome madaftar yako 😂💀
Economist claims that the equilibrium position of each firm in a perfectlycompetitive industry the equilibrium can be atthepoint where D=P=MR=AR. At that point,you can notice that the equilibrium market price, average revenue per unit is exactly equal to the average cost per unit. This means that AR*Q is exactly equal to AC*Q which means that TR is the same as TC. Since cost and revenue are the same, this means that there isno profit. so why would any producer stay in business if there isno profit to be gained from doing so?
NB: Your explanations should be supposed with a graph for more deta
1. Should the chief executive officer of Mbeya cement company listen to the chief economist?
Well, let me put on my funny hat and explain it to you with a graph. Imagine a graph that shows the quantity of cement produced on the x-axis and the marginal cost on the y-axis. Now, the rising short-run marginal cost curve means that as the quantity of cement produced increases, the marginal cost also goes up.
If the company is already operating at a loss, it means that the price they are selling their cement for is lower than their average total cost. Now, if the chief economist is saying that increasing the price a little bit would lead to an even higher marginal cost, then it is possible that the price increase wouldn't be enough to cover the increased costs. In that case, the company would end up with an even bigger loss on a higher volume of production.
So, the chief executive officer should definitely listen to the chief economist's advice. It's like saying, "Hey, don't jump from the frying pan into the fire. Let's not make matters worse by increasing production when it will only worsen our losses."
2. Why would any producer stay in business if there is no profit to be gained from doing so?
Ah, the mystery of staying in business without profits. It sounds as strange as a clown without his red nose. Let's explain it with a graph and a little humor.
In a perfectly competitive market, where D=P=MR=AR, the equilibrium occurs at the point where the average revenue (AR) per unit is equal to the average cost (AC) per unit. This means that the total revenue (TR) earned by the producer is equal to the total cost (TC) incurred.
Now, you may ask, why would anyone stay in business if there's no profit to be gained? Well, my friend, it's all about covering costs and living to fight another day. You see, the goal of a business is not just to make profits, but also to avoid losses. In a perfectly competitive market, firms may choose to stay in business as long as they can cover their costs.
Imagine this scenario: You're a clown who sells balloon animals. You don't make much profit from each balloon, but as long as you cover your costs - the cost of balloons, makeup, and your fabulous clown shoes - you can continue spreading joy and laughter. Even if there's no profit, you're not losing money, and that's a win in itself.
So, in a perfectly competitive industry, firms may decide to stay in business as long as they can cover their costs, even if there's no immediate profit to be gained. It's like having a party where the snacks aren't bringing in any extra dough, but they at least cover their own party expenses. It's all about surviving and keeping the show going, my friend!
1. Should the chief executive officer of Mbeya cement company listen to the chief economist?
To answer this question, we need to understand the concept of short-run marginal cost (MC) and the relationship between price, output, and profit. Graphically, short-run MC is represented by an upward-sloping curve.
If the company is currently operating at a loss, it means that the price it receives for its output is lower than the average cost of producing each unit. In this situation, increasing output would mean producing more units at a higher cost, which would lead to an even bigger loss.
The chief economist is advising against increasing output because the marginal cost would rise, exacerbating the loss. From a short-run perspective, this analysis makes sense. The CEO should consider the advice and refrain from increasing output unless there is a corresponding increase in price that covers the rising marginal costs.
However, it is important to note that this analysis is specific to the short run. In the long run, the company may explore other strategies, such as cost reduction or market expansion, to improve its profitability. The CEO should take both short-run and long-run considerations into account when making strategic decisions.
Here is a graph visually representing the situation:
(Insert graph showing short-run MC curve intersecting with price and average cost curves)
2. Why would any producer stay in business if there is no profit to be gained?
The economist's claim regarding the equilibrium position in a perfectly competitive industry is correct. In this market structure, firms are price takers, meaning they cannot individually influence the market price. The equilibrium occurs where the demand (D) curve intersects with the marginal revenue (MR) curve, which is equal to the price (P) and the average revenue per unit (AR).
At this equilibrium point, the market price (P) is equal to the average cost per unit (AC). This means that the total revenue (TR) earned by the firm (AR * Q) is equal to the total cost (TC) incurred (AC * Q).
While it may appear that no profit is being earned when TR equals TC, it is important to note that this analysis assumes only explicit costs are considered. Explicit costs include things like labor, raw materials, and rent. However, implicit costs, such as the opportunity cost of the business owner's time and capital invested, may still exist.
Additionally, even if there is no profit in the short run, firms may stay in business because they expect to earn profits in the long run. They may have a positive outlook for future market conditions or believe that with time, they can improve their production efficiency or differentiate their products to gain a competitive advantage.
Furthermore, some firms may stay in business even without earning profits due to non-economic or social motives. For example, a firm may be motivated by a desire to serve a specific community or to maintain market presence and brand reputation.
Here is a graph visually representing the equilibrium position in a perfectly competitive industry:
(Insert graph showing equilibrium point where D=P=MR=AR, with AR*Q = AC*Q)