Question

True or false justify your answer

TFC straight line means you could increase q without increasing that type of cost

There is no logic behind the idea that: MC must intersect the AC at its minimum

Economies of scale enable the firm to expand production while reducing the LRAC regardless of the of Q level

No economic bases for economies of scale, it is just a wishful thinking

Two perfect competition assumptions are necessary to have a meaningful market structure for a price taker producer

Answer 1

1. True. TFC or Total Fixed costs, if is in a straight line, it means that even if we increase q, this cost wouldn't increase. Hence, this is true (but only till a specified q)

2. False. The marginal cost curve always intersects the average total cost curve at its lowest point because the marginal cost of making the next unit of output will always affect the average total cost. As a result, so long as marginal cost is less than average total cost, average total cost will fall.

3. False. Only till a specific value of Q, you can increase it after which it increases the fixed costs. This can be understood by assuming that the rent for the factory is the fixed cost. If you keep on increasing Q, this rent wouldn't increase but beyond a specific point there will be no space and then to increase Q, you would be required to rent one more factory.

4. False. Economies of scale is basically the benefit you get because the fixed costs don't increase with the increase in the number of units produced. Total cost = Total Fixed costs + Total variable cost. As we increase Q, the second term on RHS increases but the first term doesn't.

5. True.