Explain why each of the following statements is false. Be thorough yet concise in your answer....

Explain why each of the following statements is false. Be thorough yet concise in your answer.

1. Consider a graph of typical cost curves for a firm. As output increases, the distance between average total cost and average variable cost increases.

2. When perfectly competitive firms make a profit, it encourages other firms to enter. Over the long-run, this entry causes the market demand curve to shift right, which increases marginal revenue for each firm. This entry continues until each firm is earning zero profit.

3. To maximize profit, a monopolist will produce and sell a quantity where MR = MC and then charge a price equal to MR.

Solutions

Expert Solution

Ans 1: This statement is false because the difference between average total cost and average variable cost is average fixed cost which declines as the output rises. So, the difference between average total cost and average variable cost goes on declining. the average fixed cost is total fixed cost divided by the quantity produced. We know that total fixed cost is constant, so as the output rises, the average fixed cost declines but remains positive as the average cannot be zero. So, the difference between average total cost and average variable cost goes on declining because the gap or difference between them represents average fixed costs.

Ans 2: This statement is false because as the competitive firms are making profits in the industry, it attracts new firms into the industry. As the new firms in the industry rises, it increases the market supply in the industry. As the market supply curve for the industry shifts to right (or rises), the market equilibrium prices falls which drives out profit and it continues until each firm is earning zero profit. Due to the entry of new firms, the market supply rises not the demand rises.

Ans 3: This statement is false because the profit maximization condition for a monopolist is MR=MC and it will charge a price where that quantity is represented on a demand curve (Average Revenue Curve). This is shown in the following diagram:

Rahul Sunny answered 2 years ago

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