Question 1

When firms grow larger,they sometimes add many additional layers of managers between the top executives and the entry-level employees.Because these managers do not actually produce any output themselves,we expect more layers of management to lead to:

Accepted Answer

Adding more layers of management between top executives and entry-level employees leads to increased bureaucracy and communication barriers, which can result in inefficiencies and higher costs. Thus, this is an example of diseconomies of scale.

Question 2

Explain the difference between an implicit cost and an explicit cost,and how both costs relate to economic and accounting profits.

Accepted Answer

The answer of Explain the difference between an implicit cost...

Question 3

If a firm experiences diseconomies of scale,its long-run average cost curve is:

Accepted Answer

If a firm experiences diseconomies of scale, it means that the firm is experiencing an increase in long-run average costs as it increases its production scale. This suggests that the long-run average cost curve is upward-sloping.

Question 4

If a firm adds multiple layers of management as it increases its scale of production,thus adding to its costs,we would expect its long-run average cost curve to be:

Accepted Answer

Adding multiple layers of management increases bureaucracy and administrative costs, which leads to diseconomies of scale. As a result, the long-run average cost curve is expected to be upward-sloping.

Question 5

Darrell owns a furniture store.If he moves into a larger store but finds that his average costs have increased in the long run,we know that Darrell is experiencing:

Accepted Answer

When average costs increase in the long run after expanding the scale of production, it indicates diseconomies of scale. This occurs when the firm becomes too large and experiences difficulty in managing its operations efficiently, causing costs to increase.

Question 6

Steve owns a bike store.Last year his average cost of selling a bike was $1,000.If he expands the size of his store this year and sees his average cost decrease to $950,his long-run average total cost curve should be:

Accepted Answer

A decrease in average cost indicates economies of scale, meaning that as the size of the store increases, the cost per unit decreases. This suggests that the long-run average total cost curve will be downward-sloping.

Question 7

When a firm grows larger,many additional layers of managers are sometimes added that do not actually produce any output.At the same time,the firm gains additional bargaining power over the prices it pays to its suppliers.If both of these factors have an equal effect,we would expect this firm to experience:

Accepted Answer

The answer of When a firm grows larger,many additional layers...

Question 8

If the firm in the accompanying graph expanded its scale of production and found that its average costs did not change,which of the curves would reflect this situation?

Accepted Answer

LRATC2 would reflect this situation as it represents the long-run average total cost curve for a specific scale of production. If the firm expands its scale of production and average costs remain the same, then it would still be operating at the same scale represented by LRATC2.

Question 9

If a firm experiences gains from specialization as it increases its scale of production,we would expect its long-run average cost curve to be:

Accepted Answer

When a firm experiences gains from specialization, it can produce more efficiently and reduce its average cost. This leads to a downward-sloping long-run average cost curve, as the firm is able to produce at a lower cost per unit as it increases its scale of production.

Question 10

Lauren owns a bakery.She currently bakes around 10,000 loaves of bread per year.If she increases the size of her bakery so that she can bake even more bread,and her long-run average total cost remains unchanged,we know that Lauren is experiencing:

Accepted Answer

If Lauren increases the size of her bakery and her long-run average total cost remains unchanged, it means she is experiencing constant returns to scale. This implies that she is able to increase her production without increasing her per unit costs, which is ideal for any business.

Question 11

Lauren owns a bakery.If she increases the size of her bakery and experiences constant returns to scale as a result,her long-run average total cost curve should be:

Accepted Answer

If Lauren experiences constant returns to scale, it means that as she increases the size of her bakery, her long-run average total cost (LRATC) remains the same. This would result in a horizontal LRATC curve, as the cost per unit of output would not change with scale. Therefore, choice C is the best answer.

Question 12

Steve owns a bike store.Last year,his average cost of selling a bike was $1,000.If he expands the size of his store this year and sees his average cost increase to $1,050,his long-run average total cost curve should be:

Accepted Answer

The answer of Steve owns a bike store.Last year,his average...

Question 13

Nathan owns a coffee-roasting company.If he increases the size of his company and experiences constant returns to scale as a result,his long-run average total cost curve should be:

Accepted Answer

With constant returns to scale, the long-run average total cost curve is expected to be horizontal. This means that as Nathan increases the size of his company, his average total cost per unit of output remains constant.

Question 14

Darrell owns a furniture store.If he decided to expand the size of his store in order to sell more furniture,how would he know if he is experiencing diseconomies of scale?

Accepted Answer

If Darrell's average cost of selling furniture increases, then he is experiencing diseconomies of scale, which means that as he expands, he is facing higher costs per unit of furniture sold.

Question 15

If a firm experiences some gains from specialization as it expands its scale of production,and adds additional layers of management as it does so,assuming they have the same effect,we would expect its long-run average total cost curve to be:

Accepted Answer

The answer of If a firm experiences some gains from...

Question 16

Nathan owns a coffee roasting company.He buys raw coffee beans,roasts them,grinds them,and sells them to stores.He recently moved into a larger factory so that he can sell coffee to more stores.How would Nathan know if he is experiencing constant returns to scale from increasing the size of his factory?

Accepted Answer

If Nathan is experiencing constant returns to scale, his long-run average cost per pound of coffee would remain the same as he increases the size of his factory. This means that the cost of producing each pound of coffee would not change despite the increase in the scale of production.

Question 17

Steve owns a bike store.Last year,his average cost of selling a bike was $1,000.If he expands the size of his store this year and sees his average cost remain the same,his long-run average total cost curve should be:

Accepted Answer

If Steve's average cost of selling a bike remains the same even after expanding the size of his store, it implies that he is enjoying constant returns to scale. In other words, he is able to produce more bikes at the same average cost per bike. As a result, his long-run average total cost curve will be horizontal.

Question 18

Lauren owns a bakery.If she decided to expand the size of her bakery so that she could bake more bread,how would she know if she is experiencing constant returns to scale?

Accepted Answer

If Lauren experiences constant returns to scale, her long-run average cost of baking each loaf of bread should remain unchanged as she expands the size of her bakery. This means that she is not experiencing any significant cost savings or increased costs due to the expansion. Any significant decrease or increase in the long-run average cost of baking each loaf would indicate decreasing or increasing returns to scale, respectively.

Question 19

Darrell owns a furniture store.If he increases the size of his furniture store and experiences diseconomies of scale as a result,his long-run average total cost curve should be:

Accepted Answer

Diseconomies of scale occur when a firm's long-run average total cost increases as it increases its scale of production. This often happens due to management difficulties and increased complexity of operations. As a result, the long-run average total cost curve becomes upward-sloping, indicating that the firm is having a harder time producing goods efficiently as it grows larger.

Question 20

If a firm experiences economies of scale,its longrun average cost curve is:

Accepted Answer

Economies of scale result in lower average costs as output increases, which is reflected in a downward-sloping long run average cost curve. Therefore, choice B is the correct answer.

Quiz 8: Business Costs and Production