For the following questions state whether they are true or false 1. A decrease i

Question

For the following questions state whether they are true or false

1. A decrease in firms’ variable costs will cause the output of the market to decrease.

2. A competitive firm will exit an industry in the long run if the market price falls below the firm's break-even price.

3. A limitation of game theory is that players are only allowed two possible strategies while players in the real world usually have more than just two options.

4. Whether or not people have identical tastes, a commonly owned property creates no social value.

5. When people have identical tastes, the rents created by a common property are totally dissipated.

Explanation / Answer

Answer

1) False

If the variable cost decreases, Average cost will also decrease, Hence suppliier will decide to supply more and supply will shift towards right and intersect Market demand at higher output level and this shift will leads to increase in output of the market.

2) True

A competitive firm will exit an indystry if price is lesser than a Break even price because, It will incurr losses at a price below Break even price. But in s a short run Competitive firm will not exit even if price falls below Break even price, because In a short run there is presence of fixed cost which incurr and does not change, hence if Price covers total variable cost it will not exit the market but if Price is lesser than Average variable cost it will exit.

3) False

In a game theory, People can have more than 2 possible strategies.

4) False

A common owned property causes social value as all goods are not like pure public goods which are not subtractable. Because some goods are subtractable they can face problem of overuse which can create social value.

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