Profit function is homogenous of degree one and non-decreasing in input prices.

Briefly explain why you think the following statements are true, false, or uncertain.

Your grade will depend largely on the quality of your explanations.

Profit function is homogenous of degree one and non-decreasing in input prices.
If the demand faced by a firm is inelastic, selling one more unit of output will decrease revenues.
It is usually assumed that a perfectly competitive firm's supply curve is given by its marginal cost curve. In order for this to be true, these additional assumptions are necessary:

I. That the firm seek to maximize profits.

II. That the marginal cost curve be positively sloped.

III. That prices exceed average variable cost.

IV. That prices exceed average total cost.

If price is equal to short‑run average variable cost, the firm is at the point known as the profit maximizing point.

Solutions

Expert Solution

(a) False, Profit function is non-increasing in input prices.

(b) True, if demand is inelastic then the demanded output does not change much with a change in prices. So, as supply increases the prices will decrease and the demand won't change hence revenue decreases.

(c) false, fourth assumption is not correct as perfect competition can not have profits and if price, P>ATC then the firm has profits.

(d) False, profit-maximizing point is P=MC. P=AVC is a shutdown point.

Rahul Sunny answered 1 year ago

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