Deck 7: Costs in the Long Run

Question 1

Below is short-run cost data for four different plant sizes. Plant 2 has exactly twice as many inputs as does Plant 1. Plant 3 has exactly three times as many inputs as does Plant 1 and Plant 4 has exactly four times as many inputs as does Plant 1.
$$\begin{array} { c c c c c } \text { Output } & \text { \$ AC: Plant 1 } & \text { \$ AC: Plant 2 } & \text { \$ AC: Plant 3 } & \text { \$ AC: Plant 4 } \\5 & 12 & 14 & 15 & 15.25 \\10 & 11 & 13 & 13.75 & 14.25 \\15 & 12 & 12 & 12.75 & 14 \\20 & 14 & 11 & 12 & 13 \\25 & 17 & 12 & 11.50 & 12.20 \\30 & 21 & 13 & 11 & 11.70 \\35 & 26 & 14 & 11.50 & 11.30 \\40 & 32 & 17 & 12 & 11 \\45 & 39 & 21 & 12.75 & 11.30 \\50 & 47 & 25 & 13.75 & 11.70\end{array}$$

-Refer to the information above to answer this question. What is economic capacity in Plant 2?

A) 20.
B) 30.
C) 40.
D) 50.

Answer 1

20.

Question 2

-Refer to the graph above to answer this question. All of the following statements except one are correct. Which is the exception?

A) Plant 1 has excess capacity at output level Q₁.
B) Output level Q₃ is economic capacity for plant size 1.
C) Output level Q₃ can be produced for the same cost in plant 1 and in plant 2.
D) Plant 2 achieves minimum efficient scale.
E) Increasing returns to scale are experienced when output is increased from Q₁ to Q₄.

Answer 2

Output level Q₃ is economic capacity for plant size 1.

Question 3

Below is short-run cost data for four different plant sizes. Plant 2 has exactly twice as many inputs as does Plant 1. Plant 3 has exactly three times as many inputs as does Plant 1 and Plant 4 has exactly four times as many inputs as does Plant 1.
$$\begin{array} { c c c c c } \text { Output } & \text { \$ AC: Plant 1 } & \text { \$ AC: Plant 2 } & \text { \$ AC: Plant 3 } & \text { \$ AC: Plant 4 } \\5 & 12 & 14 & 15 & 15.25 \\10 & 11 & 13 & 13.75 & 14.25 \\15 & 12 & 12 & 12.75 & 14 \\20 & 14 & 11 & 12 & 13 \\25 & 17 & 12 & 11.50 & 12.20 \\30 & 21 & 13 & 11 & 11.70 \\35 & 26 & 14 & 11.50 & 11.30 \\40 & 32 & 17 & 12 & 11 \\45 & 39 & 21 & 12.75 & 11.30 \\50 & 47 & 25 & 13.75 & 11.70\end{array}$$

-Which of the following statements is correct if a firm's capacity output increases from 300 to 600 and its total costs rise from $40,000 to $78,000?

A) The firm is experiencing constant returns to scale.
B) The firm is experiencing decreasing returns to scale.
C) The firm is experiencing increasing returns to scale.
D) The firm's long-run average cost must have decreased but its short-run average cost could have either decreased or increased.

Answer 3

The firm is experiencing increasing returns to scale.

Question 4

What is meant by the term economic capacity?

A) An output level where the firm is physically unable to increase output.
B) The output level where average variable cost is at a minimum.
C) The output level where average total cost is at a minimum.
D) Total fixed costs are at a minimum.

Question 5

Below is short-run cost data for four different plant sizes. Plant 2 has exactly twice as many inputs as does Plant 1. Plant 3 has exactly three times as many inputs as does Plant 1 and Plant 4 has exactly four times as many inputs as does Plant 1.
$$\begin{array} { c c c c c } \text { Output } & \text { \$ AC: Plant 1 } & \text { \$ AC: Plant 2 } & \text { \$ AC: Plant 3 } & \text { \$ AC: Plant 4 } \\5 & 12 & 14 & 15 & 15.25 \\10 & 11 & 13 & 13.75 & 14.25 \\15 & 12 & 12 & 12.75 & 14 \\20 & 14 & 11 & 12 & 13 \\25 & 17 & 12 & 11.50 & 12.20 \\30 & 21 & 13 & 11 & 11.70 \\35 & 26 & 14 & 11.50 & 11.30 \\40 & 32 & 17 & 12 & 11 \\45 & 39 & 21 & 12.75 & 11.30 \\50 & 47 & 25 & 13.75 & 11.70\end{array}$$

-Refer to the information above to answer this question. What is the best plant to use for an output of 25?

A) Plant 1.
B) Plant 2.
C) Plant 3.
D) Plant 4.
E) Any of the four plants would be fine.

Question 6

Below are some cost data pertaining to Plant 1, which has total fixed costs of $1,000. Suppose that Plant 2 is exactly twice the size of Plant 1 while using (at economic capacity) twice the amount of labour and materials, and that it produces exactly twice the output. Further, assume that the prices of these inputs do not change.
$$\begin{array} { l c } \text { Output } & \text { \$AC: Plant 1 } \\10 & 200 \\20 & 175 \\30 & 150 \\40 & 175 \\50 & 200 \\60 & 250 \\70 & 350\end{array}$$

-Refer to the information above to answer this question. What is the output produced if the total cost in Plant 2 is $14,000?

A) 10.
B) 20.
C) 30.
D) 40.
E) 80.

Question 7

All of the following statements except one are correct. Which is the exception?

A) Firms always operate in the short run.
B) The law of diminishing returns applies in both the short run and the long run.
C) All inputs are variable in the long run.
D) As output increases, long run average cost could decline, remain constant or increase.
E) The long run can be described as a planning horizon.

Question 8

-Refer to the graph above to answer this question. Between what output levels do increasing returns to scale exist?

A) Q₁ and Q₂ only.
B) Q₁ and Q₃ only.
C) Q₁ and Q₄.
D) Q₁ and Q₅.
E) Q₄ and Q₅.

Question 9

Below is short-run cost data for four different plant sizes. Plant 2 has exactly twice as many inputs as does Plant 1. Plant 3 has exactly three times as many inputs as does Plant 1 and Plant 4 has exactly four times as many inputs as does Plant 1.
$$\begin{array} { c c c c c } \text { Output } & \text { \$ AC: Plant 1 } & \text { \$ AC: Plant 2 } & \text { \$ AC: Plant 3 } & \text { \$ AC: Plant 4 } \\5 & 12 & 14 & 15 & 15.25 \\10 & 11 & 13 & 13.75 & 14.25 \\15 & 12 & 12 & 12.75 & 14 \\20 & 14 & 11 & 12 & 13 \\25 & 17 & 12 & 11.50 & 12.20 \\30 & 21 & 13 & 11 & 11.70 \\35 & 26 & 14 & 11.50 & 11.30 \\40 & 32 & 17 & 12 & 11 \\45 & 39 & 21 & 12.75 & 11.30 \\50 & 47 & 25 & 13.75 & 11.70\end{array}$$

-Refer to the information above to answer this question. Given the cost data above, which of the following statements is correct?

A) This firm experiences constant returns to scale.
B) This firm experiences increasing returns to scale.
C) This firm experiences decreasing returns to scale.
D) This firm experiences constant, increasing and decreasing returns to scale.
E) No comment about returns to scale can be made.

Question 10

Below are some cost data pertaining to Plant 1, which has total fixed costs of $1,000. Suppose that Plant 2 is exactly twice the size of Plant 1 while using (at economic capacity) twice the amount of labour and materials, and that it produces exactly twice the output. Further, assume that the prices of these inputs do not change.
$$\begin{array} { l c } \text { Output } & \text { \$AC: Plant 1 } \\10 & 200 \\20 & 175 \\30 & 150 \\40 & 175 \\50 & 200 \\60 & 250 \\70 & 350\end{array}$$

-Refer to the information above to answer this question. What is capacity output in Plant 1?

A) 10.
B) 30.
C) 60.
D) 70.

Question 11

Below is short-run cost data for four different plant sizes. Plant 2 has exactly twice as many inputs as does Plant 1. Plant 3 has exactly three times as many inputs as does Plant 1 and Plant 4 has exactly four times as many inputs as does Plant 1.
$$\begin{array} { c c c c c } \text { Output } & \text { \$ AC: Plant 1 } & \text { \$ AC: Plant 2 } & \text { \$ AC: Plant 3 } & \text { \$ AC: Plant 4 } \\5 & 12 & 14 & 15 & 15.25 \\10 & 11 & 13 & 13.75 & 14.25 \\15 & 12 & 12 & 12.75 & 14 \\20 & 14 & 11 & 12 & 13 \\25 & 17 & 12 & 11.50 & 12.20 \\30 & 21 & 13 & 11 & 11.70 \\35 & 26 & 14 & 11.50 & 11.30 \\40 & 32 & 17 & 12 & 11 \\45 & 39 & 21 & 12.75 & 11.30 \\50 & 47 & 25 & 13.75 & 11.70\end{array}$$

-Refer to the information above to answer this question. Which of the following statements about the shape of the LRAC curve is correct?

A) It is U shaped.
B) It has an inverse U shape.
C) It declines until an output of 40 is reached and is horizontal there after.
D) It declines continuously.
E) It is horizontal.

Question 12

Below are some cost data pertaining to Plant 1, which has total fixed costs of $1,000. Suppose that Plant 2 is exactly twice the size of Plant 1 while using (at economic capacity) twice the amount of labour and materials, and that it produces exactly twice the output. Further, assume that the prices of these inputs do not change.
$$\begin{array} { l c } \text { Output } & \text { \$AC: Plant 1 } \\10 & 200 \\20 & 175 \\30 & 150 \\40 & 175 \\50 & 200 \\60 & 250 \\70 & 350\end{array}$$

-Refer to the information above to answer this question. What is the total cost of producing an output of 60 in Plant 2?

A) $7,000.
B) $9,000.
C) $15,000.
D) $24,500.
E) $30,000.

Question 13

Which of the following is correct in reference to the long run?

A) All costs are explicit costs.
B) Both fixed and variable costs exist.
C) All inputs are variable.
D) Only one input is variable while all others are fixed.

Question 14

Below is short-run cost data for four different plant sizes. Plant 2 has exactly twice as many inputs as does Plant 1. Plant 3 has exactly three times as many inputs as does Plant 1 and Plant 4 has exactly four times as many inputs as does Plant 1.
$$\begin{array} { c c c c c } \text { Output } & \text { \$ AC: Plant 1 } & \text { \$ AC: Plant 2 } & \text { \$ AC: Plant 3 } & \text { \$ AC: Plant 4 } \\5 & 12 & 14 & 15 & 15.25 \\10 & 11 & 13 & 13.75 & 14.25 \\15 & 12 & 12 & 12.75 & 14 \\20 & 14 & 11 & 12 & 13 \\25 & 17 & 12 & 11.50 & 12.20 \\30 & 21 & 13 & 11 & 11.70 \\35 & 26 & 14 & 11.50 & 11.30 \\40 & 32 & 17 & 12 & 11 \\45 & 39 & 21 & 12.75 & 11.30 \\50 & 47 & 25 & 13.75 & 11.70\end{array}$$

-Refer to the information above to answer this question. If the firm is currently producing an output of 20 using Plant 1 and it decides to build Plant 2, what will happen to its short-run average cost if its output remains unchanged?

A) It will remain unchanged.
B) It will rise by $3.
C) It will fall by $3.
D) It will fall by $11.
E) It will rise by $11.

Question 15

Below are some cost data pertaining to Plant 1, which has total fixed costs of $1,000. Suppose that Plant 2 is exactly twice the size of Plant 1 while using (at economic capacity) twice the amount of labour and materials, and that it produces exactly twice the output. Further, assume that the prices of these inputs do not change.
$$\begin{array} { l c } \text { Output } & \text { \$AC: Plant 1 } \\10 & 200 \\20 & 175 \\30 & 150 \\40 & 175 \\50 & 200 \\60 & 250 \\70 & 350\end{array}$$

-Refer to the information above to answer this question. How much is total fixed cost in Plant 2?

A) $2,000.
B) $4,500.
C) $9,000.
D) $15,000.
E) $24,500.

Question 16

Below is short-run cost data for four different plant sizes. Plant 2 has exactly twice as many inputs as does Plant 1. Plant 3 has exactly three times as many inputs as does Plant 1 and Plant 4 has exactly four times as many inputs as does Plant 1.
$$\begin{array} { c c c c c } \text { Output } & \text { \$ AC: Plant 1 } & \text { \$ AC: Plant 2 } & \text { \$ AC: Plant 3 } & \text { \$ AC: Plant 4 } \\5 & 12 & 14 & 15 & 15.25 \\10 & 11 & 13 & 13.75 & 14.25 \\15 & 12 & 12 & 12.75 & 14 \\20 & 14 & 11 & 12 & 13 \\25 & 17 & 12 & 11.50 & 12.20 \\30 & 21 & 13 & 11 & 11.70 \\35 & 26 & 14 & 11.50 & 11.30 \\40 & 32 & 17 & 12 & 11 \\45 & 39 & 21 & 12.75 & 11.30 \\50 & 47 & 25 & 13.75 & 11.70\end{array}$$

-Refer to the information above to answer this question. Which of the following should the firm consider doing if it is currently producing an output of 40 using Plant 2?

A) Build Plant 3 only.
B) Build Plant 4 only.
C) Build Plant 3 or 4.
D) Scale down its plant size.

Question 17

-Refer to the graph above to answer this question. All of the following statements except one are correct. Which is the exception?

A) AC₁, AC₂ and AC₃ are long-run average cost curves.
B) The long-run average cost curve illustrates both increasing and constant returns to scale.
C) Constant returns to scale exist between outputs Q₄ and Q₅.
D) An increase in output from Q₁ to Q₃ could occur in plant 1.
E) Both the short-run and the long run-costs are illustrated in this graph.

Question 18

What is the long-run average cost curve?

A) A graphical representation of the total variable cost.
B) A measurement of the percentage of an industry's total sales which is controlled by the four largest firms.
C) A graphical representation of those costs that do not vary with the level of output.
D) A graphical representation of the average costs of production in the long run.
E) A portion of the short-run average total cost curve.

Question 19

Below are some cost data pertaining to Plant 1, which has total fixed costs of $1,000. Suppose that Plant 2 is exactly twice the size of Plant 1 while using (at economic capacity) twice the amount of labour and materials, and that it produces exactly twice the output. Further, assume that the prices of these inputs do not change.
$$\begin{array} { l c } \text { Output } & \text { \$AC: Plant 1 } \\10 & 200 \\20 & 175 \\30 & 150 \\40 & 175 \\50 & 200 \\60 & 250 \\70 & 350\end{array}$$

-Refer to the information above to answer this question. What comment can be made in reference to returns to scale between Plants 1 and 2?

A) Constant returns to scale are present.
B) Increasing returns to scale are present.
C) Decreasing returns to scale are present.
D) Diminishing marginal returns are present.

Question 20

Which of the following statements is correct?

A) A firm can operate in either the short run or the long run.
B) While a firm's plant size could be too small in the long run, its size cannot be too small in the short run.
C) A firm can enjoy economies of scale in either the short run or the long run.
D) While a firm can plan as if it is in the long run, it can operate only in the short run.

Question 21

Which of the following is the most likely cause of diseconomies of scale?

A) Increasing returns to scale.
B) A small scale of operations and output.
C) Low productivity.
D) Complex interpersonal communication structures.

Question 22

-Refer to the graph above to answer this question. Between what output levels do constant returns to scale exist?

A) Q₁ and Q₂.
B) Q₁ and Q₃.
C) Q₁ and Q₄.
D) Q₁ and Q₅.
E) Q₄ and Q₅.

Question 23

Suppose that a firm, operating efficiently, doubles the size of its operations and discovers that, as a result, its average cost of production has fallen. What does this imply?

A) Decreasing returns to scale are present.
B) Increasing returns to scale are present.
C) Constant returns to scale are present.
D) No conclusion about returns to scale can be made.

Question 24

Which of the following is true regarding economies of scale?

A) It is another term for constant returns to scale.
B) They are present only in pecuniary forms.
C) They exist in both the short run and the long run.
D) They are cost advantages that are achieved as a result of large-scale operations.

Question 25

Suppose that a firm, operating efficiently, doubles the size of its operations and discovers that, as a result, its average cost of production has increased. What does this imply?

A) Decreasing returns to scale are present.
B) Increasing returns to scale are present.
C) Constant returns to scale are present.
D) No conclusion about returns to scale can be made.

Question 26

What is the shape of the long-run average cost curve under conditions of economies of scale?

A) It is horizontal.
B) It initially falls and then rises.
C) It continuously rises.
D) It continuously falls.

Question 27

All of the following except one are examples of pecuniary economies of scale. Which is the exception?

A) Bulk buying and selling.
B) Management and machine specialization.
C) Lower costs of borrowing.
D) Lower costs of advertising.

Question 28

What is true if decreasing returns to scale are present?

A) Average fixed cost will rise.
B) Total variable cost will fall.
C) Economies of scale are also present.
D) Diseconomies of scale are present.

Question 29

What is the effect of diseconomies of scale?

A) The short-run average cost curve falls.
B) The short-run average cost curve rises.
C) The long-run average cost curve falls.
D) The long-run average cost curve rises.

Question 30

What are diseconomies of scale?

A) The situation where a firm's output decreases in proportion to the decrease in its inputs.
B) The situation where a firm is able to obtain lower prices for the inputs it buys because of bulk buying.
C) Bureaucratic inefficiencies in management that result in decreasing returns to scale.
D) The smallest level of output at which a firm is able to minimize long-run average cost.

Question 31

Which of the following would illustrate diseconomies of scale?

A) The rising segment of the SRAC curve.
B) The rising segment of the LRAC curve
C) A growing margin between short-run and long-run average cost as output increased.
D) Marginal cost below short-run average cost.
E) Marginal cost above short-run average cost.

Question 32

Technical economies of scale are closely related to which of the following?

A) The law of diminishing returns.
B) Decreasing returns to scale.
C) Rising short-run average total cost.
D) Falling short-run marginal cost.
E) Increasing returns to scale.

Question 33

Which of the following statements about diseconomies of scale is correct?

A) They pertain to the short run only.
B) They pertain to the long run only.
C) They pertain to both the short run and the long run.
D) They are synonymous with increasing returns to scale.

Question 34

-Refer to the graph above to answer this question. Can this firm produce an output of 200 at an average total cost of $40?

A) Yes, and that output would be economic capacity.
B) Yes, but production would be inefficient.
C) No, this combination is unobtainable given present resource prices and the current state of technology.
D) No, this combination would be unobtainable because production is inefficient.

Question 35

-Refer to the graph above to answer this question. Could this firm produce an output of 200 at an average total cost of $20?

A) Yes, and that output is economic capacity.
B) Yes, but production would be inefficient.
C) No, this combination would be unobtainable given present resource prices and the current state of technology.
D) No, this combination is unobtainable because production would be inefficient.

Question 36

-Refer to the graph above to answer this question. Could this firm produce an output of 200 at an average total cost of $30?

A) Yes, and that output would be economic capacity.
B) Yes, but production would be inefficient.
C) No, this combination is unobtainable given present resource prices and the current state of technology.
D) No, this combination is unobtainable because production would be inefficient.
E) Yes, and the firm is experiencing economies of scale.

Question 37

If we know that a firm is experiencing diseconomies of scale, which of the following statements is true?

A) The firm is operating on the upward-sloping segment of its LRAC curve.
B) The firm is experiencing increasing returns to scale.
C) Both pecuniary and technical economies of scale must be present.
D) If all inputs were increased by 10% then output would rise by more than 10%.
E) The firm is also experiencing diminishing marginal returns.

Question 38

All of the following, except one, are reasons for economies of scale to be present in production. Which is the exception?

A) Advantages of the division of labour.
B) Management and machine specialization.
C) Lower costs of borrowing.
D) Lower costs of advertising.
E) The law of diminishing returns.

Question 39

Which of the following statements is correct if a firm builds a large plant and, at economic capacity output, its short-run average cost increases?

A) Decreasing returns to scale must be present.
B) Increasing returns to scale must be present.
C) Constant returns to scale must be present.
D) Decreasing, increasing and constant returns to scale are all possible.

Question 40

If a firm builds a larger plant and diseconomies of scale apply, which of the following statements is correct?

A) The economic capacity output of the larger plant has a lower average cost.
B) The economic capacity output of the larger plant has the same average cost.
C) The economic capacity output of the larger plant has higher average cost.
D) The LRAC cost curve will decrease as output increases.

Question 41

Refer to the graph above to answer this question. Suppose that the firm is producing an output between Q₁ and Q₂. All of the following statements, except one, are correct. Which is the exception?

A) The firm is neither too large nor too small.
B) The firm is certainly achieving economic capacity.
C) The firm might or might not benefit by increasing or decreasing its output.
D) The firm could not benefit by increasing or decreasing its scale of plant.

Question 42

Refer to the graph above to answer this question. All of the following statements, except one, are correct. Which is the exception?

A) Firms that produce an output less than Q₁ are too small.
B) Firms that produce an output which greater than Q₂ are too large.
C) Firms that produce output Q₂ are achieving MES.
D) Firms that produce an output which is between Q₁ and Q₂ are neither too large nor too small.
E) Firms that produce an output which is less than Q₁ cannot be achieving economic capacity.

Question 43

What is the graphical effect of a decrease in the prices of factor inputs such as labour and materials?

A) The SRAC curve would shift down and the LRAC curve would shift up.
B) The SRAC curve would shift up and the LRAC curve would shift down.
C) Both the SRAC curve and the LRAC curve would shift up.
D) Both the SRAC curve and the LRAC curve would shift down.

Question 44

Assume that a firm's total cost of producing an output of 2,000 units is currently $20,000. If output increases to 2,500 units, total cost increases to $50,000 and the price of inputs and technology remain unchanged. What will be the effect on average total cost?

A) Increase of $20
B) Decrease of $10
C) Increase of $10
D) No change

Question 45

What does the term minimum efficient scale mean?

A) The largest-size plant capable of achieving minimum long-run average cost.
B) The lowest average cost of production for a particular size of plant.
C) The smallest size of plant capable of producing a particular output.
D) The lowest level of efficiency which a firm is capable of producing.
E) The smallest-size plant capable of achieving minimum long-run average cost.

Question 46

What does the term "decreasing returns to scale" mean?

A) The situation where a doubling of inputs results in output increasing by less than double.
B) The situation where a firm's output decreases in proportion to the decrease in its inputs.
C) It means that the firm is operating on the falling portion of its long run average cost curve.
D) It means that the firm is operating on the horizontal portion of its long run average cost curve.

Question 47

In the graph below six short-run average cost curves labeled a through f are illustrated.


-Refer to the graph above to answer this question. Which set of short-run average cost curves illustrates constant returns to scale?

A) a and b only.
B) a, b and c only.
C) a, b, c, and d.
D) d and e only.
E) e and f only.

Question 48

Refer to the graph above to answer this question. Which of the following statements is correct?

A) Q₁ must be the best output for a firm to produce.
B) Q₂ must be the best output for a firm to produce.
C) While it is possible for a firm to be too small, it could not be too large.
D) While it is possible for a firm to be too large, it could not be too small.
E) Firms that produce an output which is less than Q₁ cannot be achieving minimum efficient scale.

Question 49

Assume that a firm's total cost of producing an output of 1,000 units is currently $20,000. If output increases to 2,000 units, total cost increases to $40,000 and the price of inputs and technology remain unchanged, calculate the change in average total cost.

A) Increase of $20
B) Decrease of $20
C) Increase of $40
D) No change

Question 50

All of the following, except one, would result in lower average cost. Which is the exception?

A) An increase in output if the firm was operating below its capacity output.
B) Building a larger plant if the firm was experiencing increasing returns to scale.
C) Down-sizing the scale of operations if the firm was experiencing diseconomies of scale.
D) Down-sizing the scale of operations if the firm was experiencing constant returns to scale.

Question 51

Assume that a firm's total cost of producing an output of 300 units is currently $30,000. If output increases to 600 units, total cost increases to $60,000 and the price of inputs and technology remain unchanged, state whether constant returns to scale, economies of scale or diseconomies of scale exist in this case.

A) Economies of scale
B) Diseconomies of scale
C) Constant returns to scale
D) Increasing returns to scale

Question 52

Suppose that a firm's output increases from 500 to 600 units and its total cost increases from $50,000 to $72,000, and if the price of inputs and technology remain unchanged, calculate the change in average total cost and state whether constant returns to scale, economies of scale or diseconomies of scale exist in this case.

A) Increase of $20 and economies of scale
B) Increase of $20 and diseconomies of scale
C) Increase of $20 and constant returns to scale
D) No change and constant returns to scale

Question 53

Refer to the graph above to answer this question. All of the following statements except one is correct. Which is the exception?

A) The LRAC curve illustrates both the advantages of the division of labour and the law of diminishing returns.
B) Economies, diseconomies and constant returns to scale are illustrated in the LRAC curve.
C) Given the LRAC curve illustrated, a firm could be too small or too large.
D) Diseconomies of scale exist at output levels above Q₂.
Sayre - Chapter 07 #59

Question 54

Under what circumstances does an increase in inputs by x percent result in an increase in output of less than x percent?

A) Diseconomies of scale.
B) Constant returns to scale.
C) Economies of scale.
D) Minimum efficient scale.

Question 55

Suppose that a firm's output increases from 500 to 1,000 units and its total cost increases from $50,000 to $100,000, and if the price of inputs and technology remain unchanged, calculate the change in average total cost and state whether constant returns to scale, economies of scale or diseconomies of scale exist in this case.

A) Increase of $100 and economies of scale
B) Increase of $100 and diseconomies of scale
C) Increase of $100 and constant returns to scale
D) No change and constant returns to scale

Question 56

Which of the following statements is correct if the appropriately sized firm is one with a large output?

A) Constant returns to scale must begin at low levels of output.
B) Economies of scale must prevail until high levels of output are reached.
C) Diseconomies of scale must begin at low levels of output.
D) Constant returns to scale must be absent.

Question 57

What is the graphical effect of technological change?

A) The SRAC curves would shift down and the LRAC curve would shift up.
B) The SRAC curves would shift up and the LRAC curve would shift down.
C) The SRAC curves and the LRAC curve would shift up.
D) The SRAC curves and the LRAC curve would shift down.

Question 58

In the graph below six short-run average cost curves labeled a through f are illustrated.


-Refer to the graph above to answer this question. Which set of short-run average cost curves illustrates economies of scale?

A) a and b only.
B) a, b and c only.
C) a, b, c, and d.
D) d and e only.
E) e and f only.

Question 59

In the graph below six short-run average cost curves labeled a through f are illustrated.


-Refer to the graph above to answer this question. Which set of short-run average cost curves illustrates diseconomies of scale?

A) a and b only.
B) a, b and c only.
C) a, b, c, and d.
D) d and e only.
E) e and f only.

Question 60

The existence of both economies of scale and diseconomies of scale would have what effect on the LRAC curve?

A) It would make it upward-sloping.
B) It would make it downward-sloping.
C) It would give it an inverse U shape.
D) It would give it a U shape.
E) It would make it horizontal.

Question 61

If a firm builds a larger plant and constant returns to scale apply, which of the following statements is correct?

A) The capacity output of the larger plant has a lower average cost.
B) The capacity output of the larger plant has the same average cost.
C) Economies of scale are present.
D) LRAC will decrease as output increases.

Question 62

Economies of scale:

A) Is another term for constant returns to scale.
B) Are cost advantages achieved as a result of large-scale operations.
C) Only come in pecuniary forms.
D) Are the same as decreasing returns to scale.

Question 63

Which of the following is correct in reference to the long run?

A) All inputs are variable.
B) Only one input is variable, and all others are fixed.
C) Only one input is fixed and all others are variable.
D) All inputs are fixed.

Question 64

Suppose that a firm's total cost of producing an output of 400 units a day is currently $2,000. If technology and the price of inputs remain unchanged, what level of output would be produced if total cost rises to $4,000 and decreasing returns to scale exist?

A) 5 units.
B) More than 400 but less than 800 units.
C) 800 units.
D) More than 800 units.

Question 65

What is meant by the term "economic capacity"?

A) The output level at which the firm is physically unable to increase output.
B) The output level at which average variable cost is at a minimum.
C) The output level at which average total cost is at a minimum.
D) The output level at which marginal cost is at a minimum.

Question 66

Suppose a firm builds a larger plant and increases its output. Which of the following statements is correct?

A) Its MES output must increase.
B) Its MES output will decrease.
C) It will be able to achieve its MES output only if it also achieves economic capacity.
D) Its short-run average cost curve for the original plant will have shifted down.
E) Its long-run average costs must have increased.

Question 67

All of the following, except one, are examples of pecuniary economies of scale. Which is the exception?

A) A lower interest rate paid on money borrowed.
B) The ability to sell the by-products of production.
C) The ability to use specialized inputs such as a robotics assembly line.
D) The ability to obtain lower prices by buying in bulk.

Question 68

The graph below includes two plant sizes as illustrated by AC₁ and AC₂.

Refer to the graph above to answer this question. Which of the following statements is correct if a firm is operating at point a on AC₁?

A) The firm has achieved capacity output.
B) The firm is achieving MES.
C) An increase in the output would not lower costs.
D) Building a larger plant would result in lower long-run average cost.
E) Building a larger plant would not result in lower long-run average cost.

Question 69

The ability of a person to supervise 12 workers just as well as 8 is an example of:

A) The division of labour.
B) Labour specialization.
C) Management specialization.
D) Decreasing returns to scale.

Question 70

Suppose that a firm's total cost of producing an output of 400 units a day is currently $2,000. If technology and the price of inputs remain unchanged, what level of output would be produced if total cost rises to $4,000 and increasing returns to scale exist?

A) 5 units.
B) More than 400 but less than 800 units.
C) 800 units.
D) More than 800 units.

Question 71

The graph below includes two plant sizes as illustrated by AC₁ and AC₂.

Refer to the graph above to answer this question. All of the following statements except one are correct if a small market limits a firm's output to Q₁. Which is the exception?

A) The firm is not achieving capacity output in plant 1.
B) The firm is not achieving minimum efficient scale.
C) The firm is experiencing excess capacity.
D) The firm would benefit from a larger market.
E) Building a larger plant would lower the firm's average cost of producing Q₁.

Question 72

Which of the following statements is correct if a firm builds a larger plant and, at any particular output, its short-run average cost increases?

A) Diseconomies of scale must be present.
B) Economies of scale must be present.
C) Constant returns to scale must be present.
D) Economies, diseconomies, and constant returns to scale are all possible.

Question 73

Which of the following is the most likely cause of diseconomies of scale?

A) Increasing returns to scale.
B) A small scale of operations and output.
C) Low productivity.
D) Bureaucracy.

Question 74

The graph below includes two plant sizes as illustrated by AC₁ and AC₂.

Refer to the graph above to answer this question. If the firm is producing in a plant with AC₁ as its short run average cost curve, and a small market is limiting the firm's output to Q₁, which of the following statements is true?

A) Building a larger plant would lower the firm's average cost of producing Q₁₀.
B) Increasing the output in the current plant size would not lower the short-run average cost.
C) The firm would benefit from a larger market because it could build a larger plant, capture economies of scale and achieve economic capacity.
D) The firm would benefit from a larger market because it could build a larger plant and capture economies of scale, but it still would not be able to achieve economic capacity.

Question 75

Which of the following statements is correct if constant returns to scale are present?

A) A doubling of inputs will lead to output more than doubling.
B) A doubling of inputs will lead to output also doubling.
C) A doubling of output will lead to inputs more than doubling.
D) Output remains constant irrespective of inputs.

Question 76

If economies of scale are present, then:

A) Average variable costs are falling but average fixed costs are constant.
B) Average costs are constant.
C) Average costs are decreasing.
D) Average costs are increasing.

Question 77

Which of the following statements is correct?

A) A firm can operate in either the short run or the long run.
B) While a firm can plan as if it is in the long run, it can operate only in the short run.
C) The short run is a period of time of less than six months.
D) The short run is a period of time of less than one year.

Question 78

Which of the following statements is correct if a firm's capacity output increases from 400 to 800 and its total costs rise from $60,000 to $110,000?

A) The firm is experiencing constant returns to scale.
B) The firm is experiencing diseconomies of scale.
C) The firm is experiencing economies of scale.
D) The firm's long-run average cost must have decreased, but its short-run average cost could have either decreased or increased.

Question 79

What does the term "minimum efficient scale" mean?

A) The smallest size a firm can be in order to minimize both short-run and long-run average costs.
B) The smallest size a firm can be in order to minimize short-run marginal cost.
C) The smallest size a firm can be in order to minimize short-run average cost.
D) The smallest size a firm can be in order to minimize long-run marginal cost.
E) The smallest size a firm can be in order to minimize both short-run and long-run marginal cost.

Question 80

The fact that a one-minute television commercial costs a large firm no more than a small firm is an example of which of the following?

A) Increasing returns to scale.
B) Pecuniary economies of scale.
C) Technical economies of scale.
D) Management specialization.