Question

1. How do firms’ fixed costs affect their output decision?

2. Explain why MC must pass through the minimum of ATC and AVC, but not AFC

3. Can a price discriminating monopolist make more profit when it uses more prices or fewer prices?

Answer 1

Answer : In short run output decision has not been affected by fixed cost .As in short run, firm main motive is to cover variable cost from the business.In long run , total cost has been taken into an account, so when fixed cost decrease, production has been increased up to certain level.

Answer 2 : Marginal cost must pass through minimum of ATC and AVC because marginal cost of producing additional unit always affected it's ATC and AVC.So long when MC is less than ATC. This means ATC should always fall and after some time ATC will start to rise .This shows that marginal cost is part of Average total cost.when MC is lower than ATC, each additional unit produced lower the level of output.

As AFC is remain fixed and does not change with the production .It does not show any relationship between ATC and AFC.

Answer : price discrimination monopoly can earn maximum profit when they are charging different maximum price that the consumer is willing to pay. In this way they can captured whole market and earned maximum revenue through this process.