Question 1

The slope of a long-run average total cost curve exhibiting decreasing returns to scale is:

Accepted Answer

If a long-run average total cost curve exhibits decreasing returns to scale, this means that as the firm expands its production, the cost per unit increases. This implies that the slope of the curve is positive.

Question 2

Use the following to answer questions: 
-(Table: Workers and Output) Look at the table Workers and Output. After graduation you achieve your dream of opening an art shop that specializes in selling mud statues. You pay $10 per day on a loan from your uncle, and regardless of how much you produce, you pay $10 per day to each of the workers who make the mud statues. The variable cost of producing 43 statues is:

Accepted Answer

The variable cost is the cost that changes with the level of output. Since each worker is paid $10 per day and the cost is dependent on the number of workers needed to produce 43 statues, the variable cost is the total wages paid to the workers.

Question 3

The long-run average total cost of producing 100 units of output is $4, while the long-run average cost of producing 110 units of output is $4. These numbers suggest that the firm producing this output has:

Accepted Answer

The long-run average total cost remains the same when output increases from 100 to 110 units, indicating constant returns to scale.

Question 4

Decreasing and increasing returns to scale account for the shape of the:

Accepted Answer

Decreasing and increasing returns to scale refer to the changes in output that result from changes in all factors of production in the long run. These changes affect the shape of the long-run average total cost curve, which reflects the minimum average cost of producing each level of output when all inputs can be varied. When there are increasing returns to scale, the long-run average total cost curve is downward sloping, meaning that as output increases, the average cost of production decreases. When there are decreasing returns to scale, the long-run average total cost curve is upward sloping, indicating that as output increases, the average cost of production increases. Thus, the shape of the long-run average total cost curve is determined by whether there are increasing or decreasing returns to scale.

Question 5

Use the following to answer questions:
Figure: Long-Run Average Cost 
-(Figure: Long-Run Average Cost) Look at the figure Long-Run Average Cost. This firm has _____ in the output region from B to C.

Accepted Answer

The firm has decreasing returns to scale in the output region from B to C because the long-run average cost curve is upward sloping in this region. This means that as output increases, the firm's average cost of production increases.

Question 6

Buffalo Aircraft doubles the amount of all of the inputs it uses-the factory doubles in size and twice as many workers are hired. After this expansion, the number of aircraft produced triples. If the price of inputs is unchanged, this means that Buffalo Aircraft is operating with:

Accepted Answer

The doubling of all inputs and the expansion of the factory and workforce resulted in a tripling of the output, indicating significant economies of scale. This is because the increase in inputs resulted in a more than proportional increase in output, leading to a decrease in average cost per unit. Therefore, the company is operating with economies of scale.

Question 7

The U shape of the long-run average total cost curve is primarily due to:

Accepted Answer

The U shape of the long-run average total cost curve is due to economies of scale, which cause costs to decrease, and diseconomies of scale, which cause costs to increase as output expands.

Question 8

Use the following to answer questions: 
-(Table: Workers and Output) Look at the table Workers and Output. After graduation you achieve your dream of opening an art shop that specializes in selling mud statues. You pay $10 per day on a loan from your uncle, and regardless of how much you produce, you pay $10 per day to each of the workers who make the mud statues. The variable cost of producing 25 statues is:

Accepted Answer

The answer of Use the following to answer questions: 
-(Table:...

Question 9

It is common in large breweries for the long-run average total cost to decline as output increases. This indicates that many breweries operate with:

Accepted Answer

The long-run average total cost declining as output increases is a clear indication of economies of scale. This means that the brewery is able to benefit from cost savings and efficiency gains as it expands its output, leading to lower costs per unit and improved profitability.

Question 10

When an increase in the firm's output reduces its long-run average total cost, it has _____ returns to scale.

Accepted Answer

When an increase in a firm's output reduces its long-run average total cost, it is experiencing increasing returns to scale. This means that as the firm expands its production, it becomes more efficient, leading to lower average costs per unit produced.

Question 11

A firm that has diminishing returns in the management's ability to use and disseminate information as it increases production in the long run best demonstrates:

Accepted Answer

Diseconomies of scale occur when a firm grows too large and inefficiencies arise, such as difficulties in managing and disseminating information effectively.

Question 12

If your firm is operating in the negatively sloped portion of a long-run average total cost curve, then your production exhibits:

Accepted Answer

Operating in the negatively sloped portion of a long-run average total cost curve indicates increasing returns to scale, meaning output increases by a larger proportion than the increase in inputs.

Question 13

Use the following to answer questions: 
-(Table: Workers and Output) Look at the table Workers and Output. After graduation you achieve your dream of opening an art shop that specializes in selling mud statues. You pay $10 per day on a loan from your uncle, and regardless of how much you produce, you pay $10 per day to each of the workers who make the mud statues. The total cost of producing 25 statues is:

Accepted Answer

The total cost includes the fixed cost of the loan ($10) and the variable cost of paying workers. If 25 statues are produced, assuming one worker is needed, the cost is $10 (loan) + $10 (worker) = $20. However, if more workers are needed, the cost increases. Assuming two workers are needed, the cost is $10 (loan) + $20 (workers) = $30.

Question 14

A firm that has lower costs per unit as it increases production in the long run has:

Accepted Answer

An increase in production leading to lower costs per unit is indicative of increasing returns to scale. This means that as a firm grows and increases its production level, its costs per unit decrease and it becomes more efficient in its production processes.

Question 15

Use the following to answer questions: 
-(Table: Workers and Output) Look at the table Workers and Output. After graduation you achieve your dream of opening an art shop that specializes in selling mud statues. You pay $10 per day on a loan from your uncle, and regardless of how much you produce, you pay $10 per day to each of the workers who make the mud statues. The total cost of producing 43 statues is:

Accepted Answer

The total cost includes both the fixed cost (loan payment) and the variable cost (wages for workers). Assuming the number of workers needed to produce 43 statues is 4 (based on typical production tables), the cost would be $10 (loan) + $40 (4 workers x $10 each) = $50.

Question 16

The slope of a long-run average total cost curve exhibiting increasing returns to scale is:

Accepted Answer

The slope of a long-run average total cost curve exhibiting increasing returns to scale is negative, indicating that as output increases, the average total cost decreases.

Question 17

Use the following to answer questions: 
-(Table: Workers and Output) Look at the table Workers and Output. After graduation you achieve your dream of opening an art shop that specializes in selling mud statues. You pay $10 per day on a loan from your uncle, and regardless of how much you produce, you pay $10 per day to each of the workers who make the mud statues. The fixed cost of producing 25 statues is:

Accepted Answer

The fixed cost is the cost that does not change with the level of output, which in this case is the $10 loan payment.

Question 18

A manufacturing company that benefits from lower costs per unit as it grows is an example of a firm exhibiting:

Accepted Answer

A manufacturing company that benefits from lower costs per unit as it grows is an example of a firm exhibiting increasing returns to scale. This means that as the firm increases its production, it becomes more efficient and experiences cost savings, leading to lower costs per unit.

Question 19

A firm that is able to use its inputs more efficiently as it increases production in the long run best demonstrates:

Accepted Answer

Economies of scale occur when a firm becomes more efficient in its production process as it increases output, leading to a decrease in average costs in the long run.

Question 20

Use the following to answer questions:
Figure: Long-Run Average Cost 
-(Figure: Long-Run Average Cost) Look at the figure Long-Run Average Cost. This firm has _____ in the output region from 0 to A.

Accepted Answer

In the output region from 0 to A, the long-run average cost curve is downward sloping, indicating increasing returns to scale, where costs per unit decrease as output increases.

Quiz 11: Behind the Supply Curve: Inputs and Costs