development would likely decline.

5. If price falls below AVC, the firm will not be able to earn enough revenues even to cover its variable costs. In

such a case, it will suffer a smaller loss if it shuts down and produces no output. By contrast, if it stayed in
operation and produced the level of output where MR = MC, it would lose all of its fixed costs plus some

variable costs. If it shuts down, it only loses its fixed costs.

6. This scenario is called “perfect price discrimination.” The result would be that the monopolist would

produce more output, the same amount in fact as would be produced by a perfectly competitive industry.

However, there would be no consumer surplus since each buyer is paying exactly what they think the

product is worth. Therefore, the monopolist would be earning the maximum possible profits.

Chapter 10

1. An increase in demand will manifest itself as a rightward shift in the demand curve, and a rightward shift
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