Question

*Please keep both answers short thanks in advance*

Explain why some costs are considered to be variable and some fixed. How does time enter into the definition?

Does the monopolist have an incentive to reduce cost under average cost pricing? How can this be overcome?

Answer 1

Costs are considered variable if they can change with output. On the other hand costs are considered fixed if they do not change with output. Time enters in the sense that all fixed costs become variable in long run. In short run some costs can not change with output and are thus called fixed costs

2 No he does not have such incentive since he can pass price to consumers. This can be overcome by price ceiling.Regulation will also help. Price ceiling will need to reflect changing conditions