Question

Identify each of the following statements as true or false and breifly explain why in one or two short sentences:

a)In the long run equilibrium of a perfectly competitive market, the average cost of firms has to be higher than the equilibrium price.

b) "The government often provides subsidies to agricultural sector is to reduce food prices in enhance farmers income. As a result both total consumption and total output increases. Hence the total welfare of the economy increases."

c)"When the government imposes a specific tax, the higher is the price elasticity of demand, the higher is the consumers share of the tax"

d) "Price ceilings, production quotas and price support programs are government policies design to raise prices."

e) "A profit maximization firm should always produce at quantities at which the condition MC = MR satisfies."

Answer 1

1 - False

The average cost in long run in competitive firm has to be equal to the equilibrium price, not less or greater

2 - True

Since both the consumer and seller welfare are rising , the social welfare will also rise . It is total of consumer and producer surplus

3 - False

The higher is the elasticity of demand , the lower will be tax paid by buyer. Seller will pay more tax

4 - False

The policies named set the maximum price which is below equilibrium. Hence price is allowed to fall here and not rise

5 - True

MR = MC is the profit maximising condition for all types of market structures.