Question 1

If a firm builds a larger plant and its long-run average total cost does not change, the firm has constant returns to scale.False

Accepted Answer

Constant returns to scale means that if all inputs are increased by the same percentage, output will increase by the same percentage. If a firm builds a larger plant and its long-run average total cost does not change, it implies that the firm will have the same level of efficiency with the larger plant as it had with the smaller plant. This means that if the firm were to increase all inputs by the same percentage, output would also increase by the same percentage, indicating constant returns to scale.

Question 2

The level of inputs will determine a firm's:

Accepted Answer

The level of inputs, which includes factors of production such as labor, capital, and materials, directly affects a firm's ability to produce output. Without sufficient inputs, a firm cannot produce the desired level of output, and may even suffer losses due to inefficiencies. Profitability and stock price may be affected by a firm's output, but ultimately depend on a variety of external factors as well. Location of production may also be influenced by inputs, but is not directly determined by them.

Question 3

In the short run, why is it believed that the total product curve increases at a decreasing rate when more labor is added to the production function?

Accepted Answer

The answer of In the short run, why is it...

Question 4

In the short run, the average total cost curve always lies above the average variable cost curve.False

Accepted Answer

The average total cost curve includes both fixed and variable costs, while the average variable cost curve includes only variable costs. Therefore, the average total cost curve will always lie above the average variable cost curve in the short run.

Question 5

A firm employs capital as a fixed input and labor as a variable input in the short run.If the cost of capital falls, what will happen to the AVC, ATC, and MC curves? Explain.

Accepted Answer

The answer of A firm employs capital as a fixed...

Question 6

In some complex production processes (such as nuclear power plants), some inputs have to be treated as being fixed even in the long run.True

Accepted Answer

The answer of In some complex production processes (such as...

Question 7

(Table: Marie's Textbook Company) Look at the table Marie's Textbook Company.Marie has a small publishing company that produces textbooks.She has fixed costs of $500 per month and hires workers for $2,000 each per month.The table shows Marie's monthly production function.With as much precision as possible, calculate the following:
a) total cost of production when four workers are employed
b) the output level that produces the lowest average total cost
c) the price that Marie must charge in order to break even on the production of 130 textbooks

Accepted Answer

The answer of (Table: Marie's Textbook Company) Look at the...

Question 8

Suppose a short-run production function always increases at a constant rate of three units of output for every additional worker added.What does this imply about the marginal product of labor? Is this realistic? Explain.

Accepted Answer

The answer of Suppose a short-run production function always increases...

Question 9

You have rented a one-room apartment and it is time to pay the bills.You pay the rent, the basic cable bill, the electricity bill, and your grocery bill.Which of these are good examples of fixed costs and which are variable costs? Explain your reasoning.

Accepted Answer

The answer of You have rented a one-room apartment and...

Question 10

Some people use the phrase, "There are too many cooks in the kitchen" to describe any chaotic scene where nothing gets done.Relate this phrase to short-run production functions.

Accepted Answer

The answer of Some people use the phrase, "There are...

Question 11

Diminishing returns are one explanation for diseconomies of scale.True

Accepted Answer

The answer of Diminishing returns are one explanation for diseconomies...

Question 12

What are some factors that contribute to a firm achieving increasing returns to scale (or economies of scale) in the long run?

Accepted Answer

The answer of What are some factors that contribute to...

Question 13

The short-run average total cost curve is U-shaped because at low output levels the spreading effect of falling average fixed costs dominates the diminishing returns effect, while at high output levels the reverse is true.False

Accepted Answer

The statement is true. At low output levels, the spreading effect of falling average fixed costs dominates, leading to a decline in average total cost. At high output levels, the diminishing returns effect dominates, leading to an increase in average total cost.

Question 14

If average total cost is declining, marginal cost cannot be increasing.True

Accepted Answer

If average total cost is declining, marginal cost can still be increasing as long as it is below the average total cost.

Question 15

Describe the shape of the AFC curve and explain why it takes this shape.Can AFC ever intersect the
x-axis?

Accepted Answer

The answer of Describe the shape of the AFC curve...

Question 16

The advantage of specialization in production is one of the primary reasons for decreasing returns to scale.True

Accepted Answer

Decreasing returns to scale occur when increasing inputs leads to a less than proportional increase in output, often due to inefficiencies, not specialization. Specialization typically leads to increasing returns to scale.

Question 17

A production function that is characterized by economies of scale will not be subject to the operation diminishing returns.True

Accepted Answer

Economies of scale and diminishing returns are different concepts. Economies of scale refer to the cost advantages that a firm experiences as it increases production, while diminishing returns refer to the decrease in the marginal output of a production process as a single factor of production is incrementally increased, holding all other factors constant. A production function can exhibit both economies of scale and diminishing returns simultaneously.

Question 18

In the short run, the average total cost curve reaches its minimum point at a smaller level of output the short-run marginal cost curve reaches its minimum.True

Accepted Answer

In the short run, the average total cost curve reaches its minimum point at a larger level of output than the short-run marginal cost curve, as the marginal cost curve intersects the average total cost curve at its minimum point.

Question 19

If the average total cost curve and the average variable cost curveare both U-shaped, then the minimum point of the average total cost curve must lie above the minimum point of the average variable cost curve.True

Accepted Answer

The answer of If the average total cost curve and...

Question 20

Consider the statement, "When the marginal cost is rising, the average total cost must also be rising." Is this statement true or false? Explain your reasoning.

Accepted Answer

The answer of Consider the statement, "When the marginal cost...

Quiz 11: Behind the Supply Curve: Inputs and Costs