Question

5. Which of the following statements is true?

A) When the marginal product increases, the marginal cost decreases. why?

B) The marginal product of an input increases as more and more inputs are used.

C) The marginal cost curve intersects the average fixed cost curve at its minimum.

D) When the marginal cost curve lies above the average cost curve, the marginal cost curve slopes upward,

while the average cost curve slopes downward.

6. Which of the following statements is true of a perfectly competitive market? why?

A) Firms in the long run tend to earn positive economic profits.

B) Firms produce at a point where price is greater than marginal cost.

C) The equilibrium price is determined by a few large firms in the market.

D) The sum of consumer surplus and producer surplus is maximized at the equilibrium.

7. A firm is seeing a $500 loss in the short run. The fixed cost of operation for this firm is $1,000. What is

the best decision for this firm in the short run? why?

A) This firm should shut down production.

B) This firm should not shut down production.

C) There is not enough information provided to answer.

D) This firm should produce more than what it is currently producing.

Answer 1

5. A. Marginal product is the net addition to the total product by the employment of an additional unit of a factor. In the same way marginal cost is the addition to the total cost from the employment of an additional unit of a factor. There is an inverse relation between the marginal product and marginal cost. The inverse relation between the two is due to the economies of scale and diseconomies of scale. When a few factors are employed the management will be efficient to manage the input and the contribution of each factor will be higher. Then the marginal product increase and marginal cost decreases. This situation is known as the economies of scale. When the firms employ variable inputs more than the optimum the managers cannot manage the operation efficiently. Thus the contribution of each variable input will be low and its cost increase. This situation is known as diseconomies of scale.

Answer: True.

B. The marginal product of an additional unit of an input increase as more and more units of that input are used upto a point. The reason is the increasing returns to a factor.

Answer: True

C. The marginal cost curve intersects the average total cost curve at its minimum. The average fixed cost is continued to fall after its intersection with the marginal cost curve.

Answer: False.

D. When the MC curve lies above the AC curve, both AC curve and MC curve slopes upward.

Answer: False.

6. A. In a perfectly competitive market, the entry of new firms enters into the market if there is positive economic profit. This will increase the market supply and reduce the price. On the other situation, if there is loss, some firm will quit the industry and the market supply decrease and price increase. The free entry and exit of firms equate the firms MR=AR=AC. Thus in longrun the firms under perfect competition earn only zero economic profit.

Answer: False.

B. The firm under perfect competition produce output at a level where MC=MR. MR is the price of the product. If the firm increase the output beyond this level, MC increase which cause loss to the firm. If the price is above the marginal cost the competition among the producers increase the volume of output. Thus for earning maximum profit through sales maximization each firm choose to produce the level of output upto the point where MC =MR.

Answer: False.

C. There are large number of buyers and sellers in a perfectly competitive market. Each seller cannot influence the market. There is no market dominance by a few firms. The price of the product is determined by the interaction of large number of buyers and sellers.

Answer: False.

D. The consumers surplus and producers surplus is maximum at the equilibrium point. If the price is above the equilibrium price, the consumers surplus decrease and there will be deadweight loss. If the price is below the equilibrium price, the producers surplus decrease and cause deadweight loss in the economy.

Answer: True.

7. Shutdown point is the point where price is equal to AVC. If the price is above the average variable cost, the firm will continue to produce since it can cover a part of its fixed cost. So the firm will continue to produce.

Answer: B. The firm should not shut down production.