If a monopoly firm is at a level of output where MC equals 10 and is increasing, MR equals 10, and average variable cost equals 9 . To maximize profits, the firm should:
a. increase both output and price.
b. increase output but decrease the price.
c. decrease output and increase the price.
d. not change either the output or the price.
Question 2
Suppose the production of helicopters is an industry characterized by increasing returns to scale and an Argentine firm, Cicare, is the only player in this market. The firm caters to the global market and earns a profit of 10 million. Flettner, a German firm has been considering entering this market for a while, but it is aware that its entry will cause each firm to lose about 4 million. However, a government subsidy allows Flettner to enter the helicopter market and Cicare incurs a loss of 4 million due to its entry. Eventually, Flettner evolves as the monopoly supplier of helicopters while Cicare is forced to shut down. This conclusion rests on which of the following assumptions?
a. The German government is experiencing a budget surplus.
b. There is low demand for Cicare automobiles in the world market.
c. The German government is able to forecast accurately the subsidy required to induce helicopter production.
d. The quality of Flettner's helicopters are inferior compared to that of Cicare's.
e. The Argentine government is not a proponent of fair trade, hence does not retaliate by subsidizing Cicare.
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