Question

Section 2: Please answer the following question as True/False/Uncertain and fully explain the rationale for your answer. 1. Producers maximize profits by maximizing revenue and minimizing costs of production. Specifically, they determine the least cost combination of inputs based on their production function and second, they set output where revenue is maximized. (20 Points) 2. Because firms can freely choose the level of the capital and labor in the long run, long run marginal and average costs will always be lower than short run marginal costs and average total costs because the firm can always choose the least cost combination of L and K in the long run. (20 points) 3. Market power is the result of too few firms in a market and leads markets to produce inefficient outcomes because firms have incentives to restrict output below the socially optimal level leading to higher profits and a deadweight loss to society. (20 points)

Answer 1

1. I think its true that producers can maximize profit by lowering the marginal cost, maximizing revenue and minimize cost of production without reducing the quality of product

2. second assumption is also true. In long term firms, there are no fixed variables.The quantities of all inputs can be changed. While in short run firmd, there are both fixed and variable quantities.Long term firms operates at a concept of achieving required quantities at lower costs. Hence the Marginal and average cost in a long run firm is always lesser that in a short term firm.

3. Its also true that market power can negatively affect the economy. Market power is arising when the firms started to increase the cost of product above the normal market rate or by decreasing the quality of product It will leads to wealth transfer from the purchaser and hence cause efficiency loss and slowed productivity