Question 1

If all resources used in the production of a product are increased by 20 percent and output increases by 20 percent, then there must be

Accepted Answer

If a 20% increase in resources results in a 20% increase in output, then the production functions have constant returns to scale. This means that increasing all factors of production by the same percentage results in a proportional increase in output. There are no diseconomies or economies of scale in this scenario, and increasing all resources by the same percentage should not result in increasing average total costs.

Question 2

The table shows three short-run cost schedules for three plants of different sizes that a firm might build in the long run.  If the three plant sizes shown are the only ones possible, then there are economies of scale in producing

Accepted Answer

The answer of The table shows three short-run cost schedules...

Question 3

If the price of labor or some other variable resource decreased, the

Accepted Answer

If the price of labor or some other variable resource decreased, it would lead to lower production costs and the marginal cost (MC) curve would shift downward. The average fixed cost (AFC) and average variable cost (AVC) curves are not directly affected by changes in the price of resources.

Question 4

If a more efficient technology was discovered by a firm, there would be

Accepted Answer

If a more efficient technology is discovered by a firm, it would lead to a decrease in the cost of production per unit, thus resulting in a downward shift of the marginal cost (MC) curve. This is because with the discovery of more efficient technology, the firm can produce more output with the same level of input cost, which reduces the cost per unit of output.

Question 5

If all resources used in the production of a product are increased by 10 percent and output increases by less than 5 percent, then the firm is experiencing

Accepted Answer

When all resources used in the production of a product are increased by a certain percentage and output increases by a smaller percentage, the firm is experiencing diseconomies of scale. This means that the cost of production is increasing at a greater rate than the increase in output, leading to a decrease in efficiency and profitability.

Question 6

If the price of a fixed factor of production increases by 50 percent, what effect would this have on the marginal-cost schedule facing a firm?

Accepted Answer

Fixed costs do not affect marginal cost because marginal cost is concerned with the cost of producing one more unit of a good or service, which involves variable costs, not fixed costs.

Question 7

If the price of a variable resource increased for the typical firm, there would be

Accepted Answer

If the price of a variable resource (such as labor or raw materials) increases, the marginal cost (MC) of production will also increase, as it will cost more for the firm to produce each additional unit of output. Therefore, there would be an upward shift in the MC curve. The other options (A, B, and C) are not affected by changes in the price of a variable resource.

Question 8

Which of the following would contribute most to a firm experiencing "economies of scale"?

Accepted Answer

Economies of scale occur when a firm experiences lower average costs due to increased production volume. Specialization of labor and management within the firm can lead to increased efficiency and productivity, which in turn can lead to lower costs per unit of output.

Question 9

When a firm doubles its inputs and finds that its output has more than doubled, this is known as

Accepted Answer

Economies of scale occur when doubling inputs results in more than double the output. This is due to the increased efficiency and cost savings that come from producing at a larger scale. Option B is incorrect because constant returns to scale means that doubling inputs results in exactly double the output. Option C is incorrect because diseconomies of scale occur when doubling inputs results in less than double the output, and option D is incorrect because the law of diminishing returns states that as more inputs are added, the output will eventually increase at a decreasing rate.

Question 10

The firm's short-run marginal-cost curve is increasing when

Accepted Answer

When marginal product is decreasing, it means that additional units of variable input are becoming less productive. This leads to an increase in marginal cost as more resources are needed to produce a given level of output.

Question 11

In the long run, a firm will choose a plant size that has the

Accepted Answer

In the long run, a firm will choose a plant size that minimizes its average total cost of production. This is because the firm will have the flexibility to adjust its inputs in the long run to achieve a desired level of output. By minimizing average total cost, the firm can produce output at the lowest possible cost, maximizing profits. Choice A is incorrect because average fixed costs are not the only cost consideration when choosing a plant size. Choice B is incorrect because capacity does not necessarily equate to efficient production or cost minimization. Choice D is incorrect because maximizing resource use per unit of output may not necessarily result in the lowest possible cost of production.

Question 12

The following statements about the "sunk cost fallacy" are true, except

Accepted Answer

The sunk cost fallacy is not related to the fact that average fixed costs are not a major part of production costs. The other options are true: (A) the sunk cost fallacy refers to the tendency to include past costs in current decision-making, (B) it often stems from a desire to justify a past expenditure, and (D) it can lead to a situation where more money is invested into a project that is unlikely to succeed.

Question 13

A firm encountering economies of scale over some range of output will have a

Accepted Answer

Economies of scale result in a decreasing long-run average cost curve, as production increases, the cost per unit decreases due to factors such as specialization and division of labor, and more efficient use of resources.

Question 14

The table shows three short-run cost schedules for three plants of different sizes that a firm might build in the long run.  What is the long-run average cost of producing 30 units of output?

Accepted Answer

The answer of The table shows three short-run cost schedules...

Question 15

The phrase "don't cry over spilt milk" could be rephrased in economic terms by saying,

Accepted Answer

The phrase "don't cry over spilt milk" means that it is pointless to be upset or regretful about something that has already happened and can't be changed. In economic terms, this can be related to the concept of sunk costs, which are costs that have already been incurred and cannot be recovered. Sunk costs are irrelevant to a decision because they cannot be changed, so it is important to focus on future costs and benefits instead.

Question 16

Which of the following statements is true, given the total cost function: Total cost = 10Q + 5Q²+ 100?

Accepted Answer

The total cost function is TC = 10Q + 5Q^2 + 100. At Q = 10, TC = 10(10) + 5(10)^2 + 100 = 600. Average total cost (ATC) = TC/Q = 600/10 = 60, not 70. However, this is the closest to being true among the options, as the other statements are incorrect.

Question 17

Round Things, Inc.'s production process exhibits economies of scale. Currently their long-run average cost is $12/unit. If Round Things doubles its use of all inputs, its new long-run average total cost will be

Accepted Answer

Economies of scale occur when increasing the scale of production leads to a lower long-run average cost. Therefore, if Round Things doubles its inputs, its new long-run average total cost will be less than $12/unit.

Question 18

If long-run average total cost decreases as output increases, this is due to

Accepted Answer

When long-run average total cost decreases as output increases, it is due to economies of scale. This means that as a firm increases its production, it benefits from greater efficiency and lower costs per unit of output. This can come from factors such as increased specialization of labor, larger and more efficient machinery, and bulk purchasing of materials. As a result, the firm can produce more output at a lower cost per unit, leading to a decrease in long-run average total cost.

Question 19

The larger the diameter of a natural gas pipeline, the lower is the average total cost of transmitting 1,000 cubic feet of gas 1,000 miles. This is an example of one reason for

Accepted Answer

This scenario fits the concept of economies of scale, which occurs when the average total cost of production decreases as output increases. In this case, the larger diameter of the pipeline allows for greater output and lower average total cost.

Question 20

When average variable cost is at a minimum,

Accepted Answer

When average variable cost is at a minimum, it means the firm is producing output with the most efficient use of its variable inputs. This implies that the average product of labor, which measures the efficiency of labor, is at a maximum. Therefore, the correct choice is D.

Quiz 9: Businesses and the Costs of Production