Micro & Macro Economics, Agricultural Marketing and Trade

Modern theory of costs vs Traditional theory:

• Statement (I) is true: In modern cost theory (pioneered by Stigler, Andrews, et al.), the short-run average variable cost and short-run average cost curves are saucer-shaped (flat bottom) representing reserve capacity, rather than strictly U-shaped.
• Statement (II) is false: In modern theory, the long-run average cost (LAC) curve is L-shaped (or inverted J-shaped) due to continuous learning and technical economies of scale, whereas it is U-shaped in the traditional theory.
• Hence, Statement (I) is true but Statement (II) is false.

Concepts of internal and external economies of scale:

• External economies of scale arise when the expansion of the entire industry (such as development of specialized infrastructure, skilled labor pool, cheaper supply chains) lowers the long-run average cost for individual member firms.
• Internal economies of scale arise strictly from the expansion of an individual firm's own output, independent of industry size.
• Since the cost reduction here results from the output expansion of the whole industry, it represents external economies of scale.

In short-run profit maximization under perfect competition, the firm produces where Marginal Revenue equals Marginal Cost ($P = MR = MC$) and $MC$ is rising:

• Fixed costs are independent of output level; changes in fixed cost do not alter $MC$ (since $d(FC)/dQ = 0$).
• lump-sum tax acts as an addition to fixed cost, leaving $MC$ unaltered.
• profit tax (proportional tax on net profits) alters the magnitude of residual profits but does not shift the output level at which profit is maximized, as $MC$ remains unchanged.
• specific sales tax ($t$ per unit of output) directly increases variable cost and shifts the Marginal Cost curve upward by $t$ ($MC' = MC + t$), reducing the equilibrium output.