Type: Economics
Pages: 2 | Words: 405
Reading Time: 2 Minutes

Question 1: “The firm’s entire marginal cost curve is its short-run supply curve.” True or False? Why?

In my opinion, the above statement is partially true. A firm’s entire marginal cost curve is not equal to its short-run cost curve. I would argue that only a portion of the marginal cost curve equals the short-run supply curve. As stipulated by Irvin Tucker (223), it is only the portion of the marginal cost curve that forms the upper part above the minimum point that is equal to the firm’s supply curve. This is due to the fact that firms that operate in a perfectly competitive market usually set the prices of their products at the same level as the marginal cost. The minimum point is the point at which the marginal cost curve cuts the average variable cost curve from below. Moreover, the firm equates its prices of goods and services to the marginal revenues so as to maximize profits. The equality between prices of products and the firm’s marginal revenue results into the law of diminishing returns. In this regard, the firms often produce goods and services up and down along the marginal cost curve. This gives the marginal cost curve a positive slope which is similar to the firm’s supply curve. This can be illustrated in the following diagram.

Question 2: Fast-food stores often charge higher prices for their products in high-crime areas than they charge in low-crime areas. Is this an act of price discrimination? Why or why not?

In my opinion, fast-food stores are not practicing price discrimination whenever they charge higher prices for their products in high crime areas than in low crime areas. This is because the differences in prices are based on costs of providing such products in the high crime and low crime areas. I would argue that the cost of providing goods and services are higher in high crime areas as compared to low crime areas because of various social and economic risks involved, for example, risk of theft or burglary. Thus, the producers have to incur additional costs such as insurance of goods to ensure that the goods reach the customers safely. Such additional costs are passed over to the customers in such areas. Given that the price difference is purely based on difference in cost of provision of the products and not geographical disparity, fast-food stores are justified in charging high prices for their products in high-crime areas.

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