Question 1: Why should MC curve cut MR curve from below to achieve producer's equilibrium?
Question 2: At a board meeting of Balshaw's Bearings, the production manager argued that if the firm were to expand and increase the scale of its operations by 50 per cent, it would benefit from technical, marketing, financial and managerial economies. This would then enable the firm to reduce its prices, giving it a competitive advantage and enabling it to increase profits. However, the sales manager urged caution. She argued that if the firm were to increase output by 50 per cent, the market would become saturated. There was also the danger that the firm might experience diseconomies of scale, which would reduce profitability. 'It is important', she said, and 'that we do not expand beyond our optimum size.'
(i) With aid of the example, describe the 'economies of scale' enjoying by any firm that you are familiar with.
(ii) What does the sales manager mean by the phrase 'the market would become saturated'?
(iii) Explain the concept of diseconomies of scale and provide four reasons why these might occur.
(iv) What is meant by the 'optimum' scale of production?
Question 3: With aid of the examples, explain why firms practice product differentiation.
Question 4: What is price discrimination? How does it benefit firms?