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In: Economics

Examine whether the following statement is true or false. Explain. Marginal cost falls when average product rises.

Question 1.  Examine whether the following statement is true or false. Explain. Marginal cost falls when average product rises.

Question 2. Examine whether the following statement is true or false. Explain. Marginal cost is at its maximum when marginal product is at its maximum.

Question 3. Suppose you are a consultant for a firm that is perfectly competitive. The firm is worried only about its policies in the short run. What would you recommend in terms of quantity changes (raise, cut, shut down or stay put) and price changes (raise, cut, stay put) in each of the following situations:

a. P = $19 MC = $14 AVC = $20

b. P = $111 MC = $106 AVC = $107 [Notations/Abbreviations: P = price; MC = marginal cost; AVC = average variable cost]

Solutions

Expert Solution

Question 1. This statement is False. Marginal product is greater than average product when average product rises. Now to the left of maximum AP, MP is falling implying that MC is rising. Hence MC may rise or fall when AP rises.

Question 2. False. Marginal cost is at its minimum when marginal product is at its maximum. This is because of diminishing returns and increasing costs that both achieve their extremes at the same time, but for one, there is a maxima and for the other there is a minima.

Question 3. a. [5 points] P = $19 MC = $14 AVC = $20. Here P < AVC. Thus firm should shut down business

b. [5 points] P = $111 MC = $106 AVC = $107. Since P > AVC and P > MC, firm should continue business. It should produce more since profit is maximized when P = MC.

Rahul Sunny answered 2 years ago
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