Question

Examine Laws of Costs.

Answer 1

There are three main cost conditions or “laws of costs” that influence monopolist pricing and output decisions:

1. Increasing Costs (Law of Diminishing Returns or Increasing Costs):
   • As output increases, average cost (AC) and marginal cost (MC) rise.
   • The monopolist produces where MC = MR and sets output accordingly.
2. Diminishing Costs (Law of Increasing Returns or Decreasing Costs):
   • As output increases, AC and MC fall.
   • Equilibrium output is where MC = MR but at lower costs and prices than in increasing costs.
3. Constant Costs:
   • AC and MC remain constant regardless of output.
   • The AC curve is horizontal; the monopolist selects output at MC = MR.