Question 1

Capital expansion causes the average total cost curve to be shifted up for all levels of output.

Accepted Answer

Capital expansion typically increases a firm's production capacity, which can lead to economies of scale. This often results in a lower average total cost for all levels of output, shifting the average total cost curve downward, not upward.

Question 2

The U-shapes of the long-run and short-run average total cost curves

Accepted Answer

The U-shapes of the long-run and short-run average total cost curves have different causes. In the short run, the U-shape is primarily due to diminishing marginal returns to the variable input. In the long run, where all inputs are variable, the U-shape reflects economies and diseconomies of scale.

Question 3

The short run begins when a firm increases its capital input.

Accepted Answer

The short run is a period of time in which at least one factor of production is fixed and cannot be adjusted. Increasing capital input requires an adjustment in the fixed factor, making it a long-run decision.

Question 4

The long-run average total cost curve is often bumpy because

Accepted Answer

The long-run average total cost curve is bumpy because capital can often be varied only in large increments, not in tiny increments as in the short run. This creates discontinuities in the long-run cost function, resulting in a bumpy LAC curve.

Question 5

Explain what happens to variable costs when capital usage in a firm increases.

Accepted Answer

The answer of Explain what happens to variable costs when...

Question 6

In the long run, a firm can increase production by

Accepted Answer

In order to increase production in the long run, a firm must increase its capital input. This can include investing in new machinery, technology, and infrastructure. By doing so, the firm can produce more output with the same amount of input, or the same amount of output with less input. Increasing variable costs, reducing labor input, or minimizing fixed costs may provide short-term boosts in production, but in the long run, these strategies are not sustainable. Shutting down the firm, obviously, would not lead to any increase in production.

Question 7

Explain what happens to the average total cost curve when capital usage is increased.

Accepted Answer

The answer of Explain what happens to the average total...

Question 8

The price of labor relative to capital determines the amount of labor used relative to capital in a firm.

Accepted Answer

If labor is relatively cheaper than capital, firms will tend to use more labor, while if capital is relatively cheaper than labor, firms will tend to use more capital. This is known as the substitution effect. Therefore, the price of labor relative to capital does determine the amount of labor used relative to capital in a firm.

Question 9

An expansion of capital increases fixed costs but does not affect variable costs.

Accepted Answer

An expansion of capital typically increases fixed costs due to investments in assets like machinery or buildings, but it can also affect variable costs by potentially lowering them per unit produced due to increased efficiency or higher production volumes.

Question 10

Capital expansion causes the average total cost to decrease at low levels of output but increase at high levels of output.

Accepted Answer

The answer of Capital expansion causes the average total cost...

Question 11

If the price of capital rises, the firm

Accepted Answer

When the price of capital rises, it becomes relatively more expensive compared to labor. As a result, firms tend to substitute capital with labor in order to reduce costs, and therefore tend to hire less capital and more labor.

Question 12

When comparing countries with big labor supplies like India to countries with relatively lower labor supplies like the United States and Canada, we would expect production in countries like India to be

Accepted Answer

Countries with a relatively large labor supply, such as India, are likely to have lower wages and salaries for workers. This makes labor more affordable and encourages firms to use more labor-intensive production techniques, rather than investing in expensive capital equipment. Therefore, we would expect production in countries like India to be labor intensive.

Question 13

The scale of a firm increases when

Accepted Answer

The scale of a firm increases when all inputs increase, resulting in an increase in output. This is known as increasing returns to scale.

Question 14

The firm expands its capital up to the point that

Accepted Answer

The answer of The firm expands its capital up to...

Question 15

Economies of scale

Accepted Answer

Economies of scale occur when a firm's average total cost decreases as the level of output increases. This is represented by the downward-sloping portion of the long-run average cost curve, as the firm is able to take advantage of increasing returns to scale, such as specialization, better technology, or bulk purchasing.

Question 16

Capital expansion can be shown as a shift in the average total curve.

Accepted Answer

Capital expansion involves increasing the quantity of production inputs, which shifts the average total curve upward and to the right.

Question 17

Economies of scale are the same as

Accepted Answer

Economies of scale refer to a situation where an increase in the production level leads to a disproportionately larger increase in output, leading to lower costs per unit of output. This is also known as increasing returns to scale.

Question 18

The profit-maximizing decision in choosing the optimal levels of capital and labor in the long run is the same as the profit-maximizing decision in the short run.

Accepted Answer

In both the short run and the long run, the profit-maximizing decision involves choosing the combination of capital and labor that produces the highest level of output at the lowest cost. The only difference is that in the long run, the firm has the flexibility to adjust both capital and labor, while in the short run, it can only adjust labor.

Question 19

Long-run average total cost is derived from summing individual average total costs in different periods.

Accepted Answer

Long-run average total cost is not derived from individual average total costs in different periods, but rather from the combination of different inputs and technologies that minimize costs over the long run.

Question 20

Long-run average cost and short-run average cost curves have their U-shapes for the same reasons.

Accepted Answer

The U-shape of the long-run average cost curve is due to economies and diseconomies of scale, while the U-shape of the short-run average cost curve is due to the law of diminishing marginal returns.

Quiz 8: Costs and the Changes at Firms Over Time