1. Indicate whether you believe the following statements are true, false or that

Question

1. Indicate whether you believe the following statements are true, false or that you are uncertain. Support your answer with an explanation in the form of a short paragraph, a graph, or a short proof.

a. A firm with an indirect cost function C = w1.5w2.5y.has increasing returns to size.

b. Price risk reduces the quantity supplied for any given expected price.

c. A monopoly will price where price is equal to MC.

d. Indirect profit function are homogeneous of degree one in all input and output prices.

e. Decreasing returns to size implies decreasing returns to scale.

Explanation / Answer

a. A firm with an indirect cost function C = w1.5 w2.5 y. has increasing returns to size. False. It is a constant returns to size as the cost depends on the multiples of the prices of the inputs.

b. Price risk reduces the quantity supplied for any given expected price. True. Price risk is the fluctuation of the price specially downwards. Hence if price risks prevail then the quantity supplied will reduce because of law of supply.

c. A monopoly will price where price is equal to MC. False. A monopoly can charge any price it wants to maximize its profit. Hence the marginal revenue changes with change in price in accordance to the output quantity and demand. Therefore the profit is maximized where MR = MC.

d. Indirect profit function are homogeneous of degree one in all input and output prices. False. Indirect profit function are homogeneous of degree zero.

e. Decreasing returns to size implies decreasing returns to scale. True. Returns to size and scale are one and the same.

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