Question 1

Diminishing marginal returns and diseconomies of scale are two different names for the same thing.

Accepted Answer

Diminishing marginal returns occur when adding more of one input, while keeping others constant, leads to a smaller increase in output. Diseconomies of scale occur when a firm's average costs increase as it produces more output. They are related but distinct concepts.

Question 2

A firm's long-run average cost curve is derived from a series of short-run average total cost curves.

Accepted Answer

The long-run average cost curve is an envelope of short-run average total cost curves, showing the lowest cost at which a firm can produce any given level of output when all inputs are variable.

Question 3

Output (pizzas per day)
 
-Tony's Pizza's production function is shown in the table above.
a) Suppose Tony operates Plant 2. He hires 2 workers and produces 20 pizzas a day. Is the pizzeria technologically efficient? Why or why not?
b) Suppose Tony operates Plant 1. He hires 2 workers and produces 18 pizzas per day. Is Tony's Pizza technologically efficient? Why or why not? Can Tony increase production to 22 pizzas a day in the short run? If yes, how?
c) Suppose Tony operates Plant 3. What is the marginal product of labor when the fourth worker is hired? When operating Plant 3, does Tony experience diminishing marginal returns? Explain.
d) Suppose Tony currently uses Plant 3. Can he increase production from 40 to 50 pizzas per day in the short run? In the long run? If yes, how?

Accepted Answer

The answer of Output (pizzas per day)
 
-Tony's Pizza's production...

Question 4

Over the range of output for which the marginal product of labor curve is negatively sloped, the marginal cost curve is negatively sloped.

Accepted Answer

When the marginal product of labor is decreasing, the marginal cost curve is typically positively sloped because it costs more to produce each additional unit of output.

Question 5

In the long run, total variable cost is zero.

Accepted Answer

In the long run, all costs are variable, so total variable cost cannot be zero as it includes all costs that vary with the level of output.

Question 6

Tony's Pizza's production function is shown in the table above. Tony currently operates Plant 2. He hires workers at a wage rate of $50 a day and his total fixed cost is $150.
a) Calculate Tony's Pizza's total variable cost and total cost for each output level.
b) Calculate the marginal costs.
c) Calculate the average fixed costs, average variable costs, and average total costs.
d) Suppose that total fixed cost increases to $200. Explain what changes occur in the costs.

Accepted Answer

The answer of Tony's Pizza's production function is shown in...

Question 7

A firm's minimum efficient scale is the largest quantity of output at which long-run average cost reaches its highest level.

Accepted Answer

The minimum efficient scale is the smallest quantity of output at which long-run average cost reaches its lowest level.

Question 8

The long-run average cost curve is the relationship between the highest attainable average total cost and output when both the plant size and labor are varied.

Accepted Answer

The long-run average cost curve represents the lowest attainable average total cost when all inputs, including plant size and labor, are varied.

Question 9

In the long run, total fixed cost equals zero.

Accepted Answer

Total fixed cost is the sum of all fixed costs incurred over a period of time. In the long run, all costs are variable, so there are no fixed costs. Therefore, total fixed cost equals zero in the long run.

Question 10

Tony's Pizza's production function is shown in the table above. Tony hires workers at a wage rate of $50 a day and his total fixed cost is $100 for Plant 1 and $150 for Plant 2.
a) Calculate Tony's Pizza's average total costs for Plant 1. Draw the short-run average total cost curve.
b) Calculate average total costs for Plant 2. Draw the short-run average total cost curve on the same figure that you used for part a.
c) In the figure, illustrate Tony's long-run average cost curve.
d) If Tony wants to produce 34 pizzas per day, what plant size should he choose? Over what output range is it efficient to operate Plant 1?

Accepted Answer

The answer of Tony's Pizza's production function is shown in...

Question 11

A firm's long-run average cost curve is derived by adding together its short-run average total cost curves.

Accepted Answer

The long-run average cost curve is derived by finding the lowest possible cost at which each output level can be produced when all inputs are variable, not by simply adding short-run average total cost curves.

Question 12

Tony's Pizza's production function is shown in the table above. Tony currently operates Plant 1. He hires workers at a wage rate of $50 a day and his total fixed cost is $100.
a) Calculate Tony's Pizza's total variable cost and total cost for each output level.
b) Calculate Tony's marginal costs.
c) Calculate the average fixed costs, average variable costs, and average total costs.
d) Draw Tony's marginal, average variable, and average total cost curves in one figure. What is the relationship between marginal cost and average cost?

Accepted Answer

The answer of Tony's Pizza's production function is shown in...

Question 13

When a firm's long-run average cost is constant as output increases, the firm is experiencing constant returns to scale.

Accepted Answer

Constant returns to scale occur when increasing the quantity of inputs leads to a proportional increase in output, resulting in constant long-run average costs.

Quiz 11: Output and Costs

Diminishing marginal returns and diseconomies of scale are two different names for the same thing.

A firm's long-run average cost curve is derived from a series of short-run average total cost curves.

Over the range of output for which the marginal product of labor curve is negatively sloped, the marginal cost curve is negatively sloped.

In the long run, total variable cost is zero.

A firm's minimum efficient scale is the largest quantity of output at which long-run average cost reaches its highest level.

The long-run average cost curve is the relationship between the highest attainable average total cost and output when both the plant size and labor are varied.

In the long run, total fixed cost equals zero.

A firm's long-run average cost curve is derived by adding together its short-run average total cost curves.

When a firm's long-run average cost is constant as output increases, the firm is experiencing constant returns to scale.