True/False (Explain) (The explanation is the most important part – no credit will be given for True/False answer alone)
1) There are very large numbers of restaurants in major cities such as Los Angeles, and very large numbers of restaurant customers, so it is appropriate to use the supply and demand model to analyze the market for restaurants in this sort of city.
2) A particular firm has decreasing returns to scale at all levels of output. If it was divided into two smaller firms that each use exactly half the amount of all inputs compared to the original firm, and prices remained constant, the combined profits of the two smaller firms would be greater than the profit of the original firm.
3) Competitive firms always earn zero profits because their marginal cost is equal to their marginal revenue at the optimal level of production.
4) An increase in the price of an input used by a firm leads to higher costs and lower profit at the original quantity produced; therefore, it should respond by increasing its quantity produced so that its revenue will increase.