Question

Which of the following statements is FALSE?

• A. The more inelastic is the demand for a firm's product, the greater is the Lerner index.
• B. In the long-run, a perfectly competitive firm operates where its average total cost is minimized.
• C. If the monopolist sets its output such that MR, MC and AVC are all equal, the firm will be indifferent between staying open and shutting down.
• D. A profit-maximizing firm never produces where P < AVC.

Answer 1

(A) Lerner index = -1 / Ed

If Ed = -0.5

Then, Lerner index = -1 / (-0.5) = 2

If Ed = -2

Then, Lerner index = -1 / (-2) = 0.5

Hemce, the more inelastic is the demand for a firm's product, the greater is the lerner index.

Hence, Option (A) is true.

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(B) A perfectly competitive firm operates at the following point in the long run.

i.e., P = MC = AC

and MC = AC at the minimum point of AC (or MC intersects AC at its minimum point)

Therefore,  In the long-run, a perfectly competitive firm operates where its average total cost is minimized.

Hence, Option (B) is true.

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(C)

If the monopolist sets its output such that MR, MC and AVC are all equal, the firm will continue to produce. Becasue the price will be higher than AVC in this case.

The firm will be indifferent between staying open and shutting down when P = AVC.

Hence, option (C) is False.

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(D) A profit maximizing firm will shutdown the production in the short run if price is less than the AVC.

Hence, option (D) is True.

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Answer: Option (C)