State if the following statements are true/false

(a) False

Explaination:- A firm operating in a perfectly competitive industry should not shut down if it starts to earn negative profits in the short run because it is possible that the firm is earning 0 revenues and incurring 0 variable cost but there are always some fixed costs that a firm has to pay. Hence, the profits in this case could be (-FC). It should continue to operate if it's price exceeds it's average variable cost. A perfectly competitive firm should only shut down when the prices go less than its AVC.

(b) True

Explaination:- If a profit maximising monopolist operate on the elastic portion of the demand curve, then it should reduce price to earn more profits because the monopolist is the only supplier of the industry and thus face downward sloping demand curve. It may choose to produce any quantity at any price but can sell a greater quantity than before only by cutting prices. If a monopolist is producing Q1 units at P1 price and if he wants to increase its quantity to Q2 then he has to cut the price to P2 as demand curve is downward sloping. And If the demand curve is more elastic then a small cut in prices can lead large increase in quantity demanded.

(c) False

Explanation:- It's not the second price discrimination but the first price discrimination that extracts all the consumer surplus. Second price discrimination is implemented when different groups of people are charged different prices for different quantities. Here, Some of the consumer surplus are kept by those having highest demand.

(d) True

Explanation:- AVC is inversely related to AP.

AVC = TVC/Y = X*Px/Y = Px . X/Y = Px . 1/AP

Where X is the no. Of input units and Pc is its price. (AP = TP/X = Y/X)