S2W11

The concepts of diminishing marginal returns and decreasing returns to scale are similar but different. Give definitions for each and explain how they are different.

Consider two firms:

Firm Alpha is a small firm in a large city. Any reasonable amount of labour or capital that it might buy won’t affect the local price of either (i.e. the firm takes the prices of labour and capital as being fixed). What shape will this firm’s isocost curves be(linear/concave/convex)?

Firm Beta operates in labour and capital markets where bulk discounts are available on both factors of production: workers are hired via an agency, and the agency charges a bit less per worker the more workers are hired, and capital gets a similar discount for bigger quantities bought in (the discount is such that Beta always pays more in total when more labour or capital is bought in, but the per-unit cost does decline). What shape will Beta’s isocost curves be (linear/concave/convex)?

Are the following statements true or false? Explain.
I. Average fixed costs never increase with output.
II. True. ATC is given by AVC plus AFC, and since AFC cannot be negative, it must be that
TC VC.
III. Average cost can never rise while marginal costs are declining

• $24

• $27

• $26

• $22

• Yes

• No

1. 1. If a monopolist faces a perfectly horizontal demand curve, then the deadweight loss to the economy is zero.

   2. 2. Imposing a quantity tax on a monopolist will always cause the market price to increase by the amount of the tax.

2. 3. The shutdown condition is when the average revenue falls below the average fixed cost.

• True, False, True

• True, False, False

• False, False, False

• True, True, True