Question

5. If a firm has diseconomies of scale

a. If it is in a very competitive industry it would be advisable for it to scale back its production level in the long run

b. Average total cost is rising as the firm expands

c. Both a and b

d. Neither a nor b

6. In a perfectly competitive industry

a. Firms produce differentiated “ heterogeneous” products

b. Legal barriers to entry prevent the market from being monopolized

c. Firms must get a patient before producing the product

d. None of the above

7. The difference between a firm’s short run average total cost curve and its long run average total cost curve is that

a. The latter reflects a fixed amount of capital

b. The former rules out diminishing returns to labor

c. The latter reflects all the possible short run average total cost curve

d. All of the above are true

8. A profit-seeking competitive firm will want to produce at minimum efficient scale

a. Always

b. Only in the short run

c. If it would have economies of scale at that exact point

d. None of the above

9. A perfectly competitive firm faces

a. Perfectly elestic demand for its output

b. Entry of new competitors in the short run

c. Constant pressures to advertise the special features of its product

d. None of the above

10. Rank the prices prevailing in a competitive decreasing cost industry from the highest to lowest for a case where there is an increased market demand for the product

a. The original price will be highest the price will go down in the short run and go even lower in the long run

b. In the short run the price will become higher than the original price; longer term the price will fall but it will still end up higher than the original price

c. In the short run price will go up in the long run the price will fall and eventually become lower than the original price

d. None of the above

Answer 1

5. c. Both a and b

Diseconomies exist where a firm finds its Long run ATC rising as production is increased. A firm should not operate in this region because there are decreasing returns to scale under this region.

6. d. None of the above

Products are identical and there are no entry barriers as well. Every firm has equal market share so market power is not present.

7. c. The latter reflects all the possible short run average total cost curve

This is because LRAC enevlops the short run AC so that when cost falls there are increasing returns and short AC is more than long run AC,

8. d. None of the above

There is no desire to produce at MES. The only aspect of MES is that firms are willing to get benfitted from economies of scale so continue to produce untill these economies are lost.

9. a. Perfectly elestic demand for its output

10. c. In the short run price will go up in the long run the price will fall and eventually become lower than the original price