Question 1

Since the 1980s, Wal-Mart stores have appeared in almost every community in America.Wal-Mart buys their goods in large quantities and therefore at cheaper prices. Walmart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices and free parking. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that

Accepted Answer

Economies of scale refer to the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale. Wal-Mart's strategy of buying goods in large quantities for cheaper prices and locating stores where land is less expensive are examples of economies of scale in retail sales.

Question 2

Margo and Stephanie are starting separate T-shirt companies. Both will pay the same prices for shirts and stencils, but Margo chooses a more expensive silk screening machine that is capable of producing multiple shirts at once. Stephanie chooses an inexpensivemachine that only makes one shirt at a time. Each machine can be operated by one person. What can we infer about their two operations?

Accepted Answer

Given that Margo's machine is more expensive but capable of producing multiple shirts at once, her initial costs are spread over a larger number of shirts as production increases, leading to a lower average total cost (ATC) at higher levels of output compared to Stephanie's, which can only produce one shirt at a time.

Question 3

Suppose there is a technology to produce Grendels such that there are diseconomies of scale after the first unit is produced. There are both fixed (a physical plant called a lair) and variable (food that grows in lairs) costs of production. Which statement is true?

Accepted Answer

Diseconomies of scale after the first unit imply that costs per unit increase with each additional unit produced in a single facility. Therefore, it's cheaper to produce each Grendel in its own lair to avoid these increased costs.

Question 4

The difference between short-run and long-run cost is that in the short run,

Accepted Answer

In the short run, some factors of production are fixed, meaning they cannot be changed, while in the long run, all factors are variable.

Question 5

The difference between short-run and long-run cost is that in the long run,

Accepted Answer

In the long run, all factors of production, including capital, labor, and land, can be adjusted, making them variable. This contrasts with the short run, where at least one factor of production is fixed.

Question 6

In the fishing industry, the long run is described as the time in which

Accepted Answer

In the long run, all factors of production can be varied, allowing businesses to choose the scale of operation. This applies to the fishing industry and other sectors as well.

Question 7

Every year Mary rents a tiller from the local hardware store and turns over the soil in her yard to plant her garden. She decides how big a plot to till and when she is finished, she returns the tiller to the hardware store. From that point on, Mary is operating in the

Accepted Answer

Mary's decision to rent a tiller and determine the size of her plot for the season establishes her scale of operation, which is a characteristic of operating in the short run. In the short run, some factors are fixed (in this case, the size of the plot she decides to till), while others can vary (such as the amount of water or fertilizer she might use).

Question 8

Three landscapers, Allen, Betty, and Christina, are visiting the lawn and garden supply store. Allen is choosing between a mower with a 40-inch blade and a mower with a 28-inch blade. Betty is picking up her mower, which was in for scheduled maintenance. Christina is putting up a For Sale sign advertising her equipment and list of customers.Who is operating in the short run?

Accepted Answer

Betty is operating in the short run because she is not making any new investments or changes to her business operations; she is simply maintaining her existing equipment. Allen is considering a new purchase, and Christina is looking to sell her equipment and customer list, both of which are long-term decisions.

Question 9

Three landscapers, Allen, Betty, and Christina, are visiting the lawn and garden supply store. Allen is choosing between a mower with a 40-inch blade and a mower with a 28-inch blade. Betty is picking up her mower, which was in for scheduled maintenance. Christina is putting up a For Sale sign advertising her equipment and list of customers.Who is operating in the long run?

Accepted Answer

Christina is putting up a For Sale sign advertising her equipment and list of customers, which indicates that she is operating in the long run.

Question 10

Angela, Bonnie, and Carl are visiting the local paint store. Angela, owner of Angela's Artful Painting Co., is posting a Help Wanted sign because she is looking for more painters to join her crew. Bonnie, who is a sole proprietor, is placing an order for 12 gallons of green paint. Carl is a painter who is looking for a job and is reading the bulletin board in the paint shop. Who is operating in the short run?

Accepted Answer

Angela is operating in the short run because she is hiring more painters to join her crew. Bonnie is also operating in the short run because she is placing an order for 12 gallons of green paint.

Question 11

Angela, Bonnie, and Carl are visiting the local paint store. Angela, owner of Angela's Artful Painting Co., is posting a Help Wanted sign because she is looking for more painters to join her crew. Bonnie, who is a sole proprietor, is placing an order for 12 gallons of green paint. Carl is a painter who is looking for a job and is reading the bulletin board in the paint shop. Who is operating in the long run?

Accepted Answer

In economic terms, operating in the long run refers to a period where all inputs can be adjusted by the firm, and there are no fixed costs. The scenario provided does not give information about adjusting all inputs or about fixed and variable costs for Angela, Bonnie, or Carl. It simply describes their current activities, which are more indicative of short-term operations.

Question 12

Suppose you are the owner of a softball team and you are hiring laborers (players). Suppose also that not all players are equally talented, but that union rules require that they all receive the same salary. If you measure output by the number of runs scored in aseason, your total variable cost curve will take what shape, and why?

Accepted Answer

The total variable cost curve will increase at different rates because, despite uniform salaries, players have varying levels of talent, affecting the number of runs scored. Uniform salaries do not equate to uniform output due to differences in player abilities.

Question 13

Suppose you know the following facts about the Smith Lamp Factory. When they produce 2,500 lamps, the difference between the average total cost and average variable cost is only $1. If the average variable cost for 5,000 lamps is $8, what is the total cost of producing 5,000 lamps?

Accepted Answer

The difference between average total cost (ATC) and average variable cost (AVC) is the average fixed cost (AFC). Given that the difference is $1 when producing 2,500 lamps, the total fixed cost (TFC) is $2,500 ($1 * 2,500 lamps). For 5,000 lamps, if the AVC is $8, the total variable cost (TVC) is $40,000 ($8 * 5,000). The total cost (TC) is the sum of TFC and TVC, which is $42,500 ($2,500 + $40,000).

Question 14

Suppose the total cost of producing 50,000 telephones is $500,000. Suppose also that at an output of 30,000, the average total cost is $8 and the marginal cost is $6. What is true about the minimum of the average total cost curve?

Accepted Answer

The average total cost (ATC) at 30,000 units is $8, and since the marginal cost (MC) of $6 is less than the ATC at this point, it indicates that the ATC is still decreasing. Therefore, the minimum of the ATC must occur at a point beyond 30,000 units and must be less than $8, as the MC pulls the ATC down until it equals the MC.

Question 15

When the average total cost is rising, it must be the case that

Accepted Answer

When the average total cost is rising, it indicates that the cost of producing an additional unit (marginal cost) is higher than the cost per unit up to that point (average total cost), thus pulling the average upwards.

Question 16

Consider a firm that uses only one fixed input and one variable input.
a. Explain how this firm's TC, TVC, and TFC curves will be affected by a government tax on the fixed input.
 b. Explain how this firm's TC, TVC, and TFC curves will be affected by a government tax on the variable input.

Accepted Answer

The answer of Consider a firm that uses only one...

Question 17

Consider a firm that uses only one fixed input and one variable input.
a. Explain how this firm's ATC, AVC, and AFC curves will be affected by a government tax on the fixed input.
 b. Explain how this firm's ATC, AVC, and AFC curves will be affected by a government tax on the variable input.
 c. When would a tax on an input cause the MC curve to change?

Accepted Answer

The answer of Consider a firm that uses only one...

Question 18

Can a firm's average variable costs be falling if they are less than the firm's marginal costs? Explain.

Accepted Answer

The answer of Can a firm's average variable costs be...

Question 19

Can a firm's average cost be rising if it is greater than the firm's marginal cost? Explain.

Accepted Answer

The answer of Can a firm's average cost be rising...

Question 20

If a firm is operating in the range of diseconomies of scale, and if it is currently at the minimum point of its short-run average total cost curve, explain what action it can take to reduce its costs, if it does not want to change the quantity of output that it is producing.

Accepted Answer

The answer of If a firm is operating in the...

Quiz 8: Costs of Production