Economies and Diseconomies of scale explain a) The profit-maximizing level of pr

Question

Economies and Diseconomies of scale explain a) The profit-maximizing level of production b) why the firm's long run ATC is U- shaped c)Why the firm's short-run marginal cost curve cuts the short sun AVC curve at its min point. d)the distinction between fixed and variable costs.

A purely competitive seller should produce rather than shut down in the short term; a) only if TR exceeds TC b) only if TC exceeds TR c)if P is greater than AVC d) if TC is low

A perfectly discriminating pure monopolist will charge each buyer a) different prices to compensate for differences in the characteristics of the product b) the same price if per unit cost is constant for each unit of the product c) the that equals the buyer's marginal cost d) the maximum price each would be willing to pay.

Explanation / Answer

Ans:

1) if P is greater than AVC

when the price is higher than average variable cost, in the short run the firm can recover to total variable cost. Hence if P is greater than AVC a purely competitive seller should produce rather than shut down.  

2) the maximum price each would be willing to pay.

A perfectly discriminating pure monopolist will charge the maximum price each would be willing to pay, so that he can maximize the profits.

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