Indicate if the following questions are True or False. Explain “Why” your answer is True or...

Indicate if the following questions are True or False. Explain “Why” your answer is True or False.

1. Marginal costs tend to increase faster than average variable costs as firms produce more. Why?

2. Competitive firms try to become monopolistic firms. Why?

3. For a monopoly, marginal revenue is less than average revenue or demand for any given level of firm production except for its first production unit. Why?

4. Some oligopolistic firms try to collude. Why?

Solutions

Expert Solution

1. TRUE.
Marginal cost is the change in total cost for an extra unit produced.
Average cost is the total cost / Total number of goods produced.
So, to maximize the output of a firm, its need to have more variable expense to be counted. As a result the marginal cost will be increased in much higher speed than average cost.

2. TRUE.
In competitive market there are few numbers of firms who are completing themselves with similar kind of products.
In monopolistic competition the things is different. Although all the firms are competing but in this type of market one firm has its own identity that means two firms selling similar kind of products are not perfect substitute to each other. Here the firm will be more competitive benifit in long run.

3. TRUE.
As the monopolist lower downs the price of all units in order to sell more units, marginal revenue is normally less than price and hence the marginal revenue curve will lie below the demand curve.

4. TRUE.
Some oligopoly firms may collude to set a price or output level for a market in order so that it can maximize the profits. Few number of firms colluding into one firm, can act as a monopoly.

Rahul Sunny answered 10 months ago

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