ps6 - ECON1001 Tutorial 6 Q1) Which of the following is NOT...

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ECON1001 Tutorial 6
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Q1)Which of the following is NOT true of a perfectly competitive firm? A) It faces a perfectly elastic demand curve. B) It is unable to influence the market price of the good it sells. C) It seeks to maximize revenue. D) Relative to the size of the market, the firm is small. E) The firm’s only decision is how much output to produce. Ans: C
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(A) is correct. Each firm in a perfectly competitive market is facing a horizontal demand for its products. The demand is perfectly elastic because firms are selling homogeneous goods. It is very easy for the customers to find substitutes. Note that the MARKET DEMAND is not horizontal. Only the demand for individual firms’ products is perfectly elastic.
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(B) and (D) are the features of a perfectly competitive market. In a perfectly competitive market, there is a huge number of firms and each firm is of a minuscule size (compared to the whole market) Because each firm is so small, none of its action can influence the market. The firm will suffer if it deviates from the market price. There will not be any effect on the market price if the firm varies its output level. Therefore, (B) and (D) are true.
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(E) is also true. Indeed, when each firm is facing a given market price, what it can do is to determine how much output it is going to supply. The decision on output is made based on the firm’s cost function. A rational economic agent will always aim at maximising profits.
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Is maximizing profit the same as minimizing cost? What is the output level at which cost of production is minimized? Zero output !! Thus maximizing profit is not the same as minimizing cost!!
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As mentioned just now, firms always aim at maximising PROFITS. However, it does not mean that they aim at maximising REVENUE. (Profit is the difference between revenue and costs) Therefore, (C) is the only option that is NOT true.
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Q2) The Law of Diminishing Marginal Returns… A) Is a Long Run concept. B) Applies only to small and medium sized firms. C) Is a Short and Long Run concept. D) Applies only to large firms. E) Is a short run concept. Ans:E
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The Law of Diminishing Marginal Returns states that… In a production where there are fixed and variable factors, When more variable factors are added, additional output yielded by each marginal unit of input drops eventually.
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Does the Law of Diminishing Marginal Returns have anything to do with firm size? NO! LDMR holds whenever a firm has both
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ps6 - ECON1001 Tutorial 6 Q1) Which of the following is NOT...

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