MODULE 5 ASSIGNMENT ESSAY
Posted by: Write My Essay on: August 24, 2017
1. Explain why the slope of the production function falls as more workers are hired while the slope of the total cost curve rises as more output is produced.
The slope of the production function falls as more workers are hired because the production function is the relationship between the quantity of inputs that are used in order to produce a good and the quantity of the output of the good that is produced. This creates a situation where there is a diminishing marginal product, causing the production function to flatten as more people are working. The slope of the total cost curve rises as more output is produced because of the same diminishing marginal product. Essentially, there is more output produced by the workers, but the workers cost money so the production function falls as more workers are hired, reducing the overall marginal product.
2. Why is the long-run ATC also U-shaped?
In determining why the ATC is U-shaped, it is important to remember that the average total cost is the total of the average variable cost and the average fixed costs. The average fixed cost will consistently fall as the output increases, due to the fact that the fixed cost is being spread over a larger number of units. The average variable cost almost always rises as the output rises due to the fact that there is a diminishing marginal product. The ATC is a reflection of the shapes of both of the averages, and this creates the U-shape. The ATC is high when there is a low output, due to the fact that there is a fixed cost that is only being distributed over a few units. The ATC then declines when the output increases. When there is a considerable amount being produced, the ATC rises again because the average variable cost is rising substantially.
3. Why are firms in perfect competition called “price takers”? Why is P=AR=MR?
Each firm that is in perfect competition is much smaller than the size of the market. And in these cases the consumers don’t distinguish between the firms. In these cases the consumers purchase at the lowest possible price, or if there is a market price, it is at the market price. When there is perfect competition there are no inefficient firms because they have not succeeded in the market. The companies that cover their costs are able to survive. The individual firm can’t lower its price in this situation to attract more customers, because then the company wouldn’t be able to cover its costs. The company can’t raise the price because it would lose customers. There is no customer loyalty because all the firms are selling identical products, so the company simply takes the price that everyone else is charging, thus making it a price taker.
P=AR=MR because in the situation where there is perfect competition, each component is realized in both competitors, and this includes the total revenue, average revenue, and marginal revenue. There is no wiggle room in any of these categories when there is perfect competition.
4. Explain fully why the perfectly competitive firm chooses the output where P=MC.
The perfectly competitive firm chooses an output where P=MC because this allows it to realize the maximum potential revenue. If P=MC, the firm is producing the quantity at which marginal cost equals marginal revenue, and this maximizes profit. This is the most efficient use of resources.
5. Why does the short-run supply curve of the perfectly competitive firm have a positive slope?
The short-run supply curve of the perfectly competitive firm has a positive slope because the supply curve is the part of the marginal cost curve above the minimum average variable cost curve, and a perfectly competitive firm is able to maximize profit by generating the amount of output that is equal to the price and marginal cost. Due to this fact, the firm progresses along a positively sloped marginal cost curve, as a response to changing prices.