Fundamentals of Managerial Economics - Assignment Example

The paper "Fundamentals of Managerial Economics" is a good example of a macro & microeconomics assignment. In a study by Arnold (256), the decision to shut down production, in the short-run, depends on whether the firm incurs more losses by shutting down than by not closing down its operations. Even if the price is below the average total cost, it does not necessarily imply that the firm should shut down. Arnold asserts that when the price is above the average variable costs, the firm minimizes cost by continuing production than stopping. In summary, a perfectly competitive firm should continue production in the short-run provided that price exceeds the average variable cost. Conversely, the firm should shut down if the price is less than the average variable cost.

Based on the presented information about a firm in Abu Dhabi,

By comparing price and average variable cost, it is apparent that. The recommended decision for the firm in Abu Dhabi is to shut down.

Figure 1: Shot-run shut down decision

Figure 1 above shows that the price of 4AED intersects the MC curve below the average variable cost curve. At this point, the firm does not generate sufficient revenue per unit of output to cover the variable cost of producing each unit. At this point, economic loss is incurred on each unit produced and sold. By comparing the fixed cost of 200AED against total revenue of 120AED, the firm should clearly shut down because it will incur more losses on continued production.

Question 2

In order for a monopolist to practice price discrimination, it must have some control over the price (Arnold, 473). Secondly, the monopolist must be able to distinguish between sellers who would be willing and able to pay different prices. Finally, the possibility of arbitrage i.e. buying at a low price and selling at a higher price must never exist.

It is clear that monopolies are able to dictate prices in the market based on the slope of the downward-sloping demand curve. Figure 2 depicts the price set at a level that yields high returns i.e. above-average total cost (Petri, 124).