Question 1

Refer to the following table.What is the total cost of producing five units of the good?

Accepted Answer

To produce five units of the good, we need to add up the costs of producing four units and one unit, which comes out to be $840 + $185 = $1,025. Therefore, the total cost of producing five units of the good is $1,025.

Question 2

Where would we find a firm's minimum efficient scale of production?

Accepted Answer

The minimum efficient scale of production refers to the lowest level of output at which a firm can produce its goods in the most cost-efficient manner. This is typically where the firm's long-run average total cost (LRATC) curve reaches its lowest point. At this point, the firm is enjoying economies of scale, where the cost per unit of output decreases as output increases. Therefore, at the minimum efficient scale, the firm is maximizing its efficiency and minimizing its costs.

Question 3

Annabelle owns an Italian ice shop.If she decided to expand the size of her shop so that she could sell more Italian ices,how would she know if she is experiencing economies of scale in the long run?

Accepted Answer

If Annabelle experiences economies of scale in the long run, her long-run average cost of selling each Italian ice should decrease as she expands her shop. This means that as she produces more Italian ices, the cost per unit of production decreases due to increased efficiency and cost savings in bulk purchases of materials. If her costs remain the same or increase, she is not experiencing economies of scale.

Question 4

Should a firm always produce the level of output where marginal cost is lowest?

Accepted Answer

Firms should aim to produce at the level of output where marginal cost equals marginal revenue, as this is where profit is maximized. Producing at the lowest marginal cost does not necessarily maximize profits, as it does not consider revenue or demand.

Question 5

If the marginal product of labor is increasing,the marginal cost of output must be

Accepted Answer

When the marginal product of labor is increasing, it means that each additional unit of labor is producing more output than the previous unit. This increased efficiency in production leads to a decrease in the marginal cost of output, as less input (labor) is needed to produce each additional unit of output.

Question 6

Josephina owns a boxing gym.She recently expanded the size of her gym by adding another boxing ring and moving into a larger building so that she can serve more clients.How would Josephina know if she is experiencing economies of scale from increasing the size of her boxing gym?

Accepted Answer

If Josephina is experiencing economies of scale, her average cost per client should decrease as her gym size and client base increases. This is because she can spread her fixed costs (such as rent, utilities, and equipment) over a larger number of clients, resulting in lower average costs per client. Therefore, the best choice is D - her average cost per client decreases.

Question 7

Use the following graph to answer the following questions.
 
-A firm expands its scale of production and finds that its long-run average total cost curve looks like LRATC1.It might look this way because the firm

Accepted Answer

When a firm expands its scale of production, it can achieve economies of scale, which means that its long-run average total costs decrease. Negotiating lower prices with suppliers is an example of achieving economies of scale, as it reduces the cost per unit of production.

Question 8

Which of the following is a question that a firm must answer in the long run but not in the short run?

Accepted Answer

The optimal amount of capital to employ is a long-term decision as it involves major investments in machinery, equipment, and other fixed assets. Short-term decisions typically focus on adjusting variable inputs like labor or materials to meet production needs.

Question 9

It is important for a firm to know its minimum efficient scale of production because that is where

Accepted Answer

Knowing its minimum efficient scale of production helps a firm to understand the level of output at which it can produce at the lowest long-run average total cost. This helps the firm to optimize its production and minimize costs, thereby maximizing profitability.

Question 10

Refer to the following table.What is the average variable cost of producing three units of the good?

Accepted Answer

The answer of Refer to the following table.What is the...

Question 11

Which is the best example of economies of scale?

Accepted Answer

The local power company is the best example of economies of scale since the cost per unit of electricity decreases as the amount of electricity produced increases. This is due to the fixed costs of building and maintaining power plants being spread out over a larger output.

Question 12

If a firm experiences diminishing marginal product of labor,its marginal cost

Accepted Answer

When a firm experiences diminishing marginal product of labor, it means that each additional unit of labor contributes less to output than the previous one. This leads to an increase in the cost of producing each additional unit of output, or marginal cost, at an increasing rate.

Question 13

If a firm experiences productivity gains from employee specialization,its marginal cost

Accepted Answer

Productivity gains from employee specialization typically lead to a decrease in marginal cost because employees become more efficient at their tasks. However, the rate of decrease in marginal cost tends to slow down over time as the most significant efficiencies are gained early on, leading to a scenario where marginal cost decreases at a decreasing rate.

Question 14

The long-run average total costs for a firm are equal to short-run average total costs when

Accepted Answer

In the long run, all inputs are variable and a firm can choose the optimal combination of inputs to produce its output. As a result, the long-run average total cost curve is the envelope of the short-run average total cost curves. At the minimum point of the long-run average total cost curve, the firm is producing at the most efficient level possible given the technology and market conditions, meaning that the long-run average total costs are equal to the short-run average total costs. Therefore, choice B is the best option.

Question 15

Which of the following is an example of a long-run cost for a manufacturing firm?

Accepted Answer

An increase in the size of its factory represents a long-run cost for a manufacturing firm because it involves a significant capital investment and cannot be easily altered in the short-term. The other options are more short-term costs or operating expenses.

Question 16

If a firm's average total costs decrease as it increases its scale of production,the firm is experiencing

Accepted Answer

Economies of scale occur when a firm's average total costs decrease as it increases its scale of production. This can happen due to a variety of factors, such as increased specialization, bulk purchasing discounts, and spreading fixed costs over more units of output. This allows the firm to produce goods or services more efficiently and at a lower cost per unit, resulting in higher profits.

Question 17

Use the following graph to answer the following questions.
 
-Which of the curves depicts economies of scale?

Accepted Answer

The answer of Use the following graph to answer the...

Question 18

Pablo owns a record store.His total costs are $1.2 million per year,his variable costs are $750,000,and his fixed costs are $450,000 per year.Last year,Pablo sold 1,200 records.If Pablo sells 1,250 records this year (50 more than last year)and his average total cost increases to $1.28 million,we know that the

Accepted Answer

The marginal cost is the additional cost incurred to produce one more unit. Here, Pablo is selling 50 more records this year than last year, which means the marginal cost is the additional cost to produce those 50 records. We are given that the increase in total cost from last year to this year is $80,000 ($1.28 million - $1.2 million). Therefore, the marginal cost of those 50 records is $80,000.

Question 19

Lukas owns a bookstore.He currently sells 1,200 books per year.If he doubles the size of his store so he can sell 2,400 books per year and his long-run average total cost per book decreases,we know that Lukas is experiencing

Accepted Answer

Lukas is experiencing economies of scale because as he doubles the size of his store, he is able to sell more books per year and his long-run average total cost per book decreases. This means he is able to achieve cost savings due to increased efficiency and specialization.

Question 20

How will a firm know if it has grown too large,that is,when it has exceeded its minimum efficient scale of production?

Accepted Answer

When a firm exceeds its minimum efficient scale of production, its long-run average costs will start to increase. This means that the firm is now experiencing diseconomies of scale, where the cost per unit of output increases as the scale of production increases. This could be due to a number of factors such as communication breakdowns, coordination problems, and increased bureaucracy. As the firm grows too large, it may find it difficult to manage and maintain efficiency, leading to higher costs and lower profitability.

Quiz 8: Business Costs and Production