A Firm with a Fixed Production Facility: Short-Run Costs: Fill in the blanks

Average fixed cost (AFC) falls as the firm produces more units of output. The decline in AFC results from the fact that total fixed cost are spread over more output. Although AFC continues to decline as output expands, average variable cost (AVC) does not keep falling. Conversely, AVC starts rising early in the expansion process due to diminishing returns in the production process. Hence, AVC curve is U-shaped. The steady decline in AFC combined with the increase in AVC results in a U-shaped ATC curve.

The short run average total cost curve (ATC) is U-shaped because of the conflicting effects of (a) AFC and (b)AVC.

A monopolist is the sole producer in the industry, thus it is a price maker. Price maker assumption refers to the ability of a monopolist to affect the price of a product. The only constraint on market power of a monopolist is the demand curve. Law of demand applies to the monopoly. Hence, when the price increases, the quantity monopolist sells decreases.

A monopolists has (c)market power, the ability to affect the price of a product. Consumers obey the law of demand and the higher the monopolist's price the (d) less the quantity it will sell.

In a perfectly competitive industry produces at the minimum point on the average total cost curve (ATC), and thus efficiency is maximized in perfectly competitive markets. In monopolistic competition demand curve is downward sloping and the demand curve touches ATC curve on the left hand side. Hence, in monopolistic competition the long run equilibrium occurs at a rate of output less than the minimum-cost rate of output. Hence, monopolistic competition is less efficient. Monopolistically competitive firm has a downward sloping demand curve, since monopolistically competitive firm differentiates its product.

Under monopolistic competition, the average cost of production is (e)higher than the minimum, but there is also more product (f)differentiation.

In an oligopoly market, there are few dominant firms. Their action is interdependent. For instance, if an oligopoly firm cuts prices, the other firms will loose their market share and they also will cut their prices. One form of coordination between oligopoly is price fixing. In this case, firms explicitly agree to charge a uniform price.

Each firm in an oligopoly has an incentive to (g) cheat the other firms, so price fixing will be unsuccessful unless firms have some way of enforcing an (h) explicit agreement.