Economics

1. Why does the short-run marginal cost curve eventually increase for the typical firm?

The shape of the typical firm’s marginal cost curve is a result of the law of diminishing returns. If all units of a variable resource are hired at the same price, marginal cost of each additional unit of output will fall as long as the marginal product of each additional resource is rising. Marginal cost is equal to the marginal product of each additional unit of resource divided by the constant cost of each additional unit. As diminishing returns set in, the marginal product of each additional resource falls and when divided by the constant price for each unit of resource, the marginal cost will now rise.

2. Explain what allocative efficiency is and how it is achieved in pure competition?

Allocative efficiency is the production of goods and services upon the desires of the society. In a pure competition, when firms produce each good or service to the point where price and marginal cost are equal, society's resources are being allocated efficiently.

3. How does price elasticity affect the price-quantity combination and segment of the demand curve that the monopolist would prefer for price and output?

The profit-maximizing monopolist will avoid price-quantity combinations in the inelastic portion of the demand curve and prefer some price-quantity combination in the elastic portion. In the inelastic range of the demand curve, marginal revenue is negative. In this range, a drop in price will result in a drop in total revenue. It will also increase total costs, and thus decrease profits. The opposite results in the case of the elastic portion of the demand curve.

4. Why is the monopolistic competitor’s demand curve more elastic than a pure monopolist’s, but less elastic than a pure competitor’s? What factors determine the price elasticity of demand for a monopolistic competitor?

The demand curve of a monopolistically competitive firm is highly, but not...