Let's evaluate each statement to determine which one is correct:
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To calculate potential profits, firms only utilize existing sales data and hope for the best.
- This statement is misleading. While existing sales data is certainly a factor in profit calculations, firms typically use a variety of data and techniques, including market research, forecasts, cost analysis, and overall economic conditions, rather than just "hoping for the best."
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Large profits might attract new competitors to the market.
- This statement is correct. In a free market, the potential for high profits can attract new firms to enter the market, as they seek to capitalize on the profit opportunity.
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When an increase in a firm’s scale of production leads to larger average costs, there are decreasing returns to scale, or diseconomies of scale.
- This statement is also correct. When increasing the scale of production results in higher average costs, it indicates that the firm is experiencing diseconomies of scale.
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The shape of a firm’s long-run average cost curve does not depend on how costs vary with the scale of operations.
- This statement is incorrect. The shape of the long-run average cost curve is directly influenced by how costs change as a firm changes its scale of operations.
Based on this evaluation, the most correct statements are "Large profits might attract new competitors to the market" and "When an increase in a firm’s scale of production leads to larger average costs, there are decreasing returns to scale, or diseconomies of scale." However, if asked for a single correct statement, the focus on the attraction of new competitors is often a key principle in economics, suggesting it might be the more relevant answer in a competitive market context.
1 answer