Question

TRUE/FALSE QUESTIONS Consider the following list of statements. Each statement is either true or false. You must read each statement carefully and then select the option that you believe is correct as your answer. In your answer book, write down only the question number and next to the number either True or False. Example: If you believe sub-question 2.11 is true, then write down: 2.11: True. 2.1. Peter is a plumber. He employs three workers and has some capital in the form of a small van, plumbing tools and other plumbing equipment. The long run" for Peter can be defined as the time it takes Peter to buy an additional van. 2.2. If price elasticity of demand is 1.6 and a firm reduces the price of its product by 10%, it would expect its total revenue to decrease by 6%. 2.3. The profit-maximising level of output for a perfectly competitive firm is where average revenue equals average total cost. 2.4. A perfectly competitive firm will continue producing in the short run as long as it covers its variable cost. 2.5. A downward-sloping demand curve exists for a monopolist, but not a perfectly competitive firm. 2.6. Monopolistic competition is a market structure characterised by the fact that there is often collusion between the sellers. 2.7. Half-price specials are not an example of non-price competition. 2.8. Under perfect competition the individual firm is faced by a demand curve for the product of the firm that is perfectly elastic, which means that it is upward sloping 2.9. Average variable cost (AVC) is the total variable cost (TVC) divided by total cost (TC). 2.10. Total fixed cost remains unchanged when total product increases and therefore marginal fixed cost is always equal to marginal variable cost.

Answer 1

2.1. The Van, plumbing tools and other plumbing equipments that Peter has considered to be his fixed factors. The workers he employs is his variable factors. The shortrun is a period which is not enough to change the amount of fixed factors. He can change the amount of variable factors. In longrun the amount of fixed factor can be changed. The longrun is a period which is long enough to alter the fixed factors. Thus longrun is a period that takes peter to buy additional van.

Answer: True.

2.2. If PED is greater than 1(PED˃1) the total revenue decrease with increase in price. Then a profit maximizing firm can increase the sales and total revenue by decreasing the price. But increase in the price cause reduction in sales and total revenue. In short if PED is greater than 1 say 1.6 the sales and total revenue increase with fall in price and total revenue and sales decrease with rise in price. Here the price decreased by 10% then it is expected that the total revenue to increase.

Answer: False.

2.3. The profit maximizing output of a perfectly competitive firm is one where the marginal cost is equal to marginal revenue (MC=MR). If MR or price is greater than the average total cost, the firm will earn positive economic profit. If MR is lower than the ATC the firm incurs loss. The revenue of the firm is maximum at a point of output where MC=MR. Since each output can be sold at a single price average revenue is equal to marginal revenue. Then the equilibrium condition can be written as MC=MR=AR.

Answer: False

2.4. In shortrun the firm cannot quit from the industry. The time is not enough for a firm to quit the industry. Thus in shortrun if the price falls below the average cost the firm starts incurring losses. But it will continue in production as long as the firm can recover its variable cost. If the price falls below the variable cost, the firm will shut down. When the price is above the variable cost the firm can recover its variable cost and a part of fixed cost. But when the price reaches to below the variable cost, the firm is losing both fixed cost and variable cost fully. Then the firm will shutdown.

Answer: True

2.5. In a monopoly market the demand curve is downward sloping curve. The monopolist can sell more output by reducing the price. He can also increase the price by restricting the output. The reason is that a single seller controls the market and as such there is absence of competition. Thus the monopolist faces a downward sloping demand curve. But under perfect competition there are large number of buyers and sellers and each buyer and seller has perfect knowledge about the market. Because of the presence of perfect competition no seller is able to alter the market price by independent action. Each seller accepts the market price and adjusts his output accordingly. The demand curve faced by a competitive firm is perfectly elastic and it is parallel to the OX axis. If one seller increase the price, his demand falls to zero and if one lowers the price others also lowers the price. Thus the firm does not get any benefit from lowering the price.

Answer: True

2.6. In a monopolistic competition there are many buyers and sellers of the product. The product of each seller is differentiated from the other. The product differentiation is promoted through difference in trade mark, brand name, colour, shape and size etc. The products are substitute to other. The product differentiation gives monopoly power to a seller over his product. The substitutability and the existence of large number of sellers create competition among sellers. Since each seller has monopoly power over his product there is no collusion regarding price and output determination. The firm usually indulges in non price competition.

Answer: False.

2.7. The non price competition is the methods followed by the firm to attract customers other than changing the price. It includes after sales service, free gift, coupons, free home delivery, extended warranty and lucky contest etc. Any competitive method to promote sales other than price is non price competition. Half meal special is a price competition.

Answer: False

2.8. A perfectly elastic demand curve is a horizontal line parallel to X axis.

Answer: False.

2.9. Average variable cost is the total variable cost divided by the number of output produced. It is the variable cost per unit of output. AVC= TVC/Q. Total cost includes fixed cost and variable cost.

Answer: False.

2.10. The fixed cost remains constant irrespective to the output. Marginal cost is the addition to the total cost when output increase. In shortrun there is no addition to the fixed cost. The output is increased by adding more variable factors. Hence there is no marginal fixed cost. There will be only marginal variable cost.

Answer: False.