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Micro Economics - Essay Example

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1. When the firm's average total cost curve lies above its marginal revenue curve at the profit maximizing level of output, the firm is experiencing losses and will have to consider whether to shut down its operations. The decisions taken by a firm in such situations is termed as Short-run shut down decisions…
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Micro Economics
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Download file to see previous pages Profit is the difference between the total revenue obtained from sales and the total cost incurred by the firm.
In the long-run the decisions taken would be only exit decisions. Exit decisions are decisions taken by a firm to leave the market. They are not called as Shut-down decisions. Shut-down is only in the short-run. Long run equilibrium plays a crucial role in deciding the existence of the firm. In the long run there are enough time periods for the firm to cover its losses and earn normal profits. This is because in the long run, all inputs are variable and the firm can have the most profitable level of output i.e. the profit maximization level of output.
(B) In the recent years, the business travel market has seen a tremendous change with respect to the airline industry. Changes in demand for leisure travel include more short term breaks and more independent holidays where passengers book flights, car and accommodation by themselves. The reason for the decline in business class travel is the supply led high business fares which stretched the so called "inelastic business class segment" and also he expansion of low cost airlines.
2. Price Discrimination can be defined as the method of charging different prices for essentially the same good to different buyers. There are three types of Price discrimination. They are, first, second and third degree discrimination.
First-degree discrimination - This is the most extreme form of discrimination in which each consumer is charged the maximum price he would be willing to pay for each individual unit consumed. This kind of discrimination can be noticed in the healthcare industry where doctors charge different fees from different patients.
Second-degree price discrimination - This is a more practical form of price discrimination. Here firms charge a different price for each set of units sold. Different prices are charged for different blocks or portions of consumption. This kind of price discrimination is followed in the power and telecom industry. The reason behind this is the prices are based on the quantities of output purchased by individual consumers. By doing so, the firms can profit as the quantities used or consumed vary from individual to individual and hence if there is a high consumption by a particular consumer, there is a chance for the firm to earn more profits.
Third-degree price discrimination - This is the most common form of price discrimination. Consumers or markets are segmented on the basis of their price elasticity of demand. Often, third-degree price discrimination occurs in the markets that are geographically separated. Foe example, books published by American publishers are sold in other countries at a lower price than in the U.S. Evidently, buyers in the other countries have greater elasticity' of demand that US buyers. At the same time, the high shipping costs makes it unprofitable for firms to buy in foreign countries and resell in the United States.
(B) Whenever we travel, is it a train or a flight, it is noticed that adults are charged a different price for the ticket and children are charged a different price. Other similar price discrimination in the same context is that rails some have rail cards entitling them to discounts; others do not. It is cheaper for people who book in advance. This ...Download file to see next pagesRead More
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