Question 2

Determine whether each of the following statements is True or False. Carefully explain your answer.

(a) "When an excise tax on petrol is imposed on the suppliers, the demand for petrol decreases due to the shift of the demand curve to the left. This, in turn, leads to an increase in the equilibrium price of petrol."

(b) "When a firm production process generates positive externalities imposing an appropriately chosen subsidy per unit of output is going to decrease the firm's marginal cost. This will in turn cause the firm to produce at the point where the social marginal benefit of the last unit of output is equal to the marginal cost. The resulting quantity of output will be efficient from the social point of view."

(c) "A monopoly firm is in the short-run equilibrium making a positive economic profit. An increase in the Fixed Cost of production is going to lead to a higher price in this market because monopoly will want to compensate for the increase in its fixed cost by reducing the output and increasing the market price."

(d) "A competitive market is in the long-run equilibrium with each firm making zero economic profit. This means that eventually, firms will start exiting this industry because they cannot make any money staying in this business."