Question

The following statements are incorrect. Briefly explain why it is incorrect. For all sub-questions, consider Labor L as the first input on the x-axis, and capital K as the second input on the y-axis. Use graphs or numerical examples to help explain.

1. "If my firm becomes more productive as I expand the business and increase the production, it means that my production will exhibit increasing returns to scale. Therefore, all isoquants will shift inward."
2. "Suppose my firm becomes more productive after using a new technology. Then my TC, ATC, and MC will all shift up."
3. "In a perfectly competitive market, a firm will produce at a quantity such that price equals marginal cost. Given MC = P, the firm would make zero profit."

Answer 1

The first statement is incorrect because increasing returns to scale lead to the expansion of isoquants, not their inward shift. The second statement is incorrect because a more productive firm after using a new technology will see a decrease in total cost, average total cost, and marginal cost, rather than an upward shift. The third statement is incorrect because in a perfectly competitive market, a firm produces at a quantity where marginal cost equals marginal revenue, not price.

Step-by-step explanation:

The first statement is incorrect because if a firm becomes more productive and exhibits increasing returns to scale, all isoquants will shift outward, not inward. This is because increasing returns to scale means that the firm can produce more output without a proportionate increase in inputs. As a result, the isoquants will spread outwards.

The second statement is incorrect because if a firm becomes more productive after using a new technology, the total cost (TC), average total cost (ATC), and marginal cost (MC) will all shift down, not up. This is because the new technology lowers the cost of production, leading to a decrease in costs at all levels of output.

The third statement is incorrect because in a perfectly competitive market, a firm will produce at a quantity such that marginal cost equals marginal revenue, not price. This is because the firm is a price taker and has no control over the market price. If MC is equal to MR, the firm maximizes its profit but does not necessarily make zero profit.