Question 1

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 long run and short run, the goal of the firm is to maximize profits. Therefore, the profit-maximizing decision in choosing the optimal levels of capital and labor will be the same in both the long run and the short run.

Question 2

The scale of a firm increases when

Accepted Answer

In order for the scale of a firm to increase, all inputs must increase. This means that the firm is producing more output and has a higher level of production. If only one input increases or some inputs increase while others decrease, the scale of the firm is not necessarily increasing as the output level may remain the same.

Question 3

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 4

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 5

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

Accepted Answer

Countries with a big labor supply like China can afford to have labor-intensive production because labor is relatively abundant and thus cheaper for companies. This means that companies can hire more workers to produce goods, which can lead to greater output and lower costs. On the other hand, countries with relatively lower labor supplies like the United States and Canada would expect production to be more capital-intensive because labor is relatively more expensive, and so companies invest in capital-intensive technologies to save costs.

Question 6

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 7

If the price of capital rises, the firm

Accepted Answer

When the price of capital rises, it becomes relatively more expensive compared to labor. Therefore, firms tend to substitute away from capital towards labor, which is now relatively cheaper. As a result, they tend to hire less capital and more labor.

Question 8

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

Accepted Answer

When there is capital expansion, the average total cost curve shifts downwards to reflect the fact that the firm can produce at a lower cost with the new capital. This shift is indicated by a new curve that lies beneath the original curve.

Question 9

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 10

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 11

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

Accepted Answer

The price of labor relative to capital affects the cost of production and therefore influences the amount of labor used relative to capital in a firm. If labor is relatively cheap, firms may choose to use more labor and less capital. If capital is relatively cheap, firms may choose to use more capital and less labor. Therefore, the price of labor relative to capital is an important factor in determining the production process of a firm.

Question 12

In the long run, a firm can increase production by

Accepted Answer

Increasing capital input allows for the firm to have better technology, more efficient production processes, and potentially a larger scale of production which can lead to an increase in output in the long run. The other options listed, such as increasing variable costs or minimizing fixed costs, may not necessarily lead to an increase in production. Reducing labor input may also not be feasible depending on the industry and the type of production being done. Shutting down would obviously lead to no increase in production.

Question 13

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.

Question 14

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 15

Economies of scale are the same as

Accepted Answer

Economies of scale refer to the phenomenon where increasing production leads to a decrease in average cost per unit. This is known as increasing returns to scale, as the firm is able to take advantage of cost efficiencies and spread fixed costs over a larger output. Decreasing returns to scale occur when increasing production leads to an increase in average cost per unit, constant returns to scale occur when increasing production has no effect on average cost per unit, and diminishing marginal returns occur when adding one more unit of input leads to a decrease in output. The increasing marginal product of labor refers to the phenomenon where adding one more unit of labor leads to an increase in output.

Question 16

The firm expands its capital up to the point that

Accepted Answer

A firm expands its capital to maximize profits, which involves balancing costs and revenues to achieve the highest possible profit level.

Question 17

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

Accepted Answer

Long-run average total cost is the cost per unit of output when all factors of production are variable in the long run. It is not derived by summing individual average total costs in different periods.

Question 18

Economies of scale

Accepted Answer

Economies of scale occur when the firm experiences lower average costs as a result of producing a greater quantity of output. This is represented by the downward-sloping portion of the long-run average cost curve, which shows that as output increases, the average cost per unit of output decreases.  Therefore, choice A is the correct answer as it directly relates to economies of scale.

Question 19

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 20

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 input (usually capital) is fixed and cannot be changed by the firm. It is not initiated by an increase in capital input, but rather by the existence of fixed inputs.

Quiz 8: Costs and the Changes at Firms Over Time