Question

Are the following statements True / False / Uncertain? Support your answer with explanation. 1. It is even better for a perfectly competitive firm to produce output even though it is loosing money. 2. If the output elasticity of the total cost is less than one, we have disec- onomies of scale. 3. Inputs are perfect substitutes when one input can always be substitutes for the other on fixed terms and thus corresponding production function is called fixed-proportion production function. 4. A price ceiling makes consumers better off. 5. Any input bundle on an isocost curve yields a higher output than any point below the isocost curve.

Answer 1

1> T

Even if it is losing money, it can sometime be profitable to produce in the short run when the average variable cost is lower than the price.

2> T

If the output elasticity of the toal cost is less than one, then the total cost grows faster than the total output, so it must be a diseconomies of scale.

3> F

For a fixed proportion production functions, the inputs are compliments which can not be substituted for one another.

4> F

A price celiing creates inefficiency in the system, the quantity supplied is lesser than the equilibrium quantity, so consumer loses consumer surplus.

As per HomeworkLib rule, first 4 have been answered.