Question

1.By definition, price discrimination is when people are charged different prices based on their ethnicity, race or gender.

True

False

2.All theoretical monopolists are assumed to be able to price discriminate.

True

False

3.In a perfectly competitive market, as described in the Mankiw text, each firm has an incentive to watch the behavior of other competitive firms in the market, and to adjust to the behavior of other individual firms.

True

False

4.Standard Economic theory as presented in the text by Mankiw suggests that the firm should produce a positive amount of output so long as average sunk costs are below marginal revenue.

True

False

5.if Average Fixed Cost is falling, then Average Total Cost must also be falling as output increases.  

True

False

6.If a profit maximizing theoretical competitive firm (as described in the Mankiw text) has total revenue larger than average variable costs, but smaller than average total cost; then it is earning negative profit, but will NOT shut down in the short run.

True

False

7.If average total cost is falling as output increases, then marginal cost must be falling as well.

True

False

8.Sunk costs are one component of the Marginal Cost

True

False

Answer 1

1. TRUE

Explanation:

Price discrimination means charging a different price to different consumers for the same product. In general, the way of discrimination takes the form of gender, ethnicity, etc. For eg. there are many concessions for women and for senior citizens in train tickets, metro tickets, etc.

2. TRUE.

Explanation:

In Monopoly, firms are price setter rather than price taker and hence it is possible for a monopolist to charge a different price to a different buyer. Thus all monopolists can practice price discrimination if they are willing to do that.

3.FALSE

Explanation:

There needs no strategy or need to observe rival firms' actions in perfect competition. Because in perfect competition the output is homogenous in all respect and thus each firm isT supposed to charge a single price which further equals the marginal cost of production. The very assumptions of Perfect Competition do not allow any deviation from this situation. At the fixed market price firms can sell any level of quantity (as there are infinite numbers of buyers in perfectly competitive market). So making an optimal choice by observing other firms' actions makes no sense there.

4. FALSE

Explanation:

Standard Economic theory as presented suggests that the firm should produce a positive amount of output so long as average variable costs are below marginal revenue, not the average sunk cost. It is the reason why the minimum point of the average variable cost (AVC) is known as the Shut-Down point.

5.FALSE

Explanation:

Consider an example of a cost function: TC = 16+Q+Q^2

Here, Total Fixed Cost, TFC = 16

hence average fixed cost, AFC= (TFC/Q) = (16/Q)

Average Cost, AC = (TC/Q) = (16/Q)+1+Q

Here, it seems AFC is falling across as Q increases.

But by setting d(AC)/dQ = 0 we get -

- (16/Q^2)+1 = 0

Or, Q^2 = 16

Or, Q=4

Hence, up to Q=4 AC, is falling but thereafter AC tends to increase ( You can verify bu putting various values of Q)

Alternative Explanation:

You can see from any standard diagram of the Average Total Cost curve, you will find the Average Total Cost curve is "U" Shaped i.e. it falls initially and beyond a certain level it tends to rise.

6. FALSE

Explanation:

If a profit-maximizing theoretical competitive firm has Price larger than average variable costs, but smaller than average total cost; then it is earning a negative profit, but will NOT shut down in the short run.

and an alternative statement can be stated as -

If a profit-maximizing theoretical competitive firm has total revenue larger than total variable costs, but smaller than total cost; then it is earning a negative profit, but will NOT shut down in the short run.

These two above statements are equivalent. In this situation,

Total Variable Cost < Total Revenue < Total Cost

i.e. the firm will be at least able to make up its total variable cost and a portion of the total fixed cost. Hence in short-run loss is lower than the total fixed cost ( a portion a total fixed cost can be made up by total revenue). But if the firm shut-down it will incur a loss given by the total fixed cost. So here the firm should not shut-down.

7. FALSE

Explanation:

The standard relation between Average Total Cost (ATC) and Marginal Cost ( MC) is given by -

When MC falls, AC falls as well but MC<AC, when AC is minimum MC=AC and then when MC increases AC increases as well but MC>AC.

The standard relation between AC & MC clearly contradicts the given statement. There is a portion of Output where MC increases but AC falls as output level(Q) increases.

8.FALSE

Explanation:

Sunk Cost is defined as a cost that has to be incurred but has no relation to production. While Marginal Cost is the incremental cost associated with each additional unit of production.

Thus while Marginal Cost solely depends on the production units but the sunk cost has no relation with production at all. This sunk cost can't be a part of marginal cost.