Economics l1

deepakkrkanodia
Finance Junkie
Posts: 49
Joined: Thu Aug 09, 2012 4:45 pm

Economics l1

Q1. Given output of 500 units at total cost of \$2,000, fixed cost of \$1000 and marginal costs of \$2 and market price of \$2, to achieve optimum output, a firm operating in perfect competitive
markets should
A. Not change its output level
B. Reduce output and keep producing
C. Increase output to earn high profits keeping price constant

PLEASE EXPLAIN WHY THE ANSWER IS "A" AND HOW MARGINAL REVENUE IS DERIVED HERE.

Q2. PLEASE EXPLAIN THE FOLLOWING STATEMENTS AND SEE IF THEY ARE TRUE:

a) when regulators force monopolists to follow marginal price, price is fixed where MC curve intersects demand curve
b) when regulators force monopolists to follow average cost price, price is fixed where ATC curve intersects demand curve

Q3. PLEASE EXPLAIN THE PRODUCT AND COST CURVE IN SIMPLE TERMS AS DIFFICULT TO COMPREHEND I.E. WHAT DOES a) marginal and average product curves and b) cost curves SIGNIFIES

shreyas
Finance Junkie
Posts: 83
Joined: Thu Jul 19, 2012 6:49 pm

Economics l1

Answer for Question Number 1:
For perfectly competitive market, MR=P=MC=\$2
In perfectly competitive market, If Producer starts producing more he will not be able to gain profit because Marginal cost would be higher than Marginal revenue for extra quantity produced.

shreyas
Finance Junkie
Posts: 83
Joined: Thu Jul 19, 2012 6:49 pm

Economics l1

Answer to Question 3:
Marginal Product refers to additional output with one extra input of factor of production.
It means, if we are getting 2 extra units as an output with one extra worker then we can say MP is 2.
Average product is pretty simple which is nothing but an average output (Total Product/Total Input of factor of production) with considering all resources(inputs) and total output.
Here Product refers to Quantity and not cost.

deepakkrkanodia
Finance Junkie
Posts: 49
Joined: Thu Aug 09, 2012 4:45 pm
mr shreyas plz reply to question no. 2

shreyas
Finance Junkie
Posts: 83
Joined: Thu Jul 19, 2012 6:49 pm

Economics l1

Answer to Question 2:
Both statements are true.
We set P=MC in case of A and P=AC In case of B. And without regulation monopolists operate at P>MC