Question 1

Lauren owns a bakery. If she increases the size of her bakery and experiences constant returns to scale as a result, her long-run average total cost curve should be:

Accepted Answer

If Lauren experiences constant returns to scale, then her long-run average total cost curve should be horizontal. This means that her average total cost per unit will remain the same regardless of how much she produces.

Question 2

If the firm in the accompanying graph expanded its scale of production and found that its average costs did not change, which of the curves would reflect this situation?

Accepted Answer

If the firm expands its scale of production and finds that its average costs do not change, it means that the production is still being carried out at the minimum efficient scale, and LRATC2 represents this scale as it intersects with the firm's MC curve at the lowest point. LRATC1 and LRATC3 represent scales below and above the minimum efficient scale, respectively, and would not reflect a situation where average costs remain unchanged after an expansion of production.

Question 3

Lauren owns a bakery. If she decided to expand the size of her bakery so that she could bake more bread, how would she know if she is experiencing constant returns to scale?

Accepted Answer

Constant returns to scale occur when increasing production does not increase the long-run average cost of producing each unit of output. Therefore, Lauren would know that she is experiencing constant returns to scale if her long-run average cost of baking each loaf of bread remains unchanged.

Question 4

When a firm grows larger, many additional layers of managers are sometimes added that do not actually produce any output. At the same time, the firm gains additional bargaining power over the prices it pays to its suppliers. If both of these factors have an equal effect, we would expect this firm to experience:

Accepted Answer

Constant returns to scale means that the increase in inputs leads to a proportional increase in output. Since both factors (additional layers of managers and increased bargaining power) have an equal effect, they cancel each other out and the firm would experience constant returns to scale.

Question 5

Explain the difference between an implicit cost and an explicit cost, and how both costs relate to economic and accounting profits.

Accepted Answer

The answer of Explain the difference between an implicit cost...

Question 6

If a firm experiences economies of scale, its long-run average cost curve is:

Accepted Answer

If a firm experiences economies of scale, it means that as the firm increases its output, its average costs of production decrease. This is often due to spreading fixed costs (such as rent, utilities, and equipment) over a larger output, as well as other efficiencies that come with increased size. Because average costs are decreasing as output increases, the long-run average cost (LRAC) curve will slope downward.

Question 7

If a firm experiences some gains from specialization as it expands its scale of production, and adds additional layers of management as it does so, assuming they have the same effect, we would expect its long-run average total cost curve to be:

Accepted Answer

The answer of If a firm experiences some gains from...

Question 8

Steve owns a bike store. Last year, his average cost of selling a bike was $1,000. If he expands the size of his store this year and sees his average cost remain the same, his long-run average total cost curve should be:

Accepted Answer

If the average cost of selling a bike remains the same and the size of the store expands, it means that the fixed costs will have to be spread over a larger quantity of bikes. This will result in a decrease in the average total cost curve. The curve will be horizontal at the level of the average cost of selling a bike.

Question 9

Nathan owns a coffee roasting company. He buys raw coffee beans, roasts them, grinds them, and sells them to stores. He recently moved into a larger factory so that he can sell coffee to more stores. How would Nathan know if he is experiencing constant returns to scale from increasing the size of his factory?

Accepted Answer

If Nathan is experiencing constant returns to scale, his long-run average cost per pound of coffee would remain the same as he increases the size of his factory. This means that the cost of producing each pound of coffee would not change despite the increase in the scale of production.

Question 10

When firms grow larger, they sometimes add many additional layers of managers between the top executives and the entry-level employees. Because these managers do not actually produce any output themselves, we expect more layers of management to lead to:

Accepted Answer

Diseconomies of scale occur when the cost per unit increases as the size of the organization increases. With additional layers of management, there may be communication problems, increased bureaucracy, and higher administrative costs, all of which can lead to inefficiencies and higher costs. Therefore, we can expect diseconomies of scale to occur with more layers of management.

Question 11

Darrell owns a furniture store. If he decided to expand the size of his store in order to sell more furniture, how would he know if he is experiencing diseconomies of scale?

Accepted Answer

Diseconomies of scale occur when the cost per unit increases as the scale of production increases. Therefore, if Darrell's average cost of selling furniture increases due to expansion, he is experiencing diseconomies of scale.

Question 12

Steve owns a bike store. Last year, his average cost of selling a bike was $1,000. If he expands the size of his store this year and sees his average cost increase to $1,050, his long-run average total cost curve should be:

Accepted Answer

The long-run average total cost curve is upward-sloping because as the size of the store increases, the average cost of selling a bike increases.

Question 13

Lauren owns a bakery. She currently bakes around 10,000 loaves of bread per year. If she increases the size of her bakery so that she can bake even more bread, and her long-run average total cost remains unchanged, we know that Lauren is experiencing:

Accepted Answer

If Lauren increases the size of her bakery and her long-run average total cost remains unchanged, it means she is experiencing constant returns to scale. This implies that she is able to increase her production without increasing her per unit costs, which is ideal for any business.

Question 14

Nathan owns a coffee-roasting company. If he increases the size of his company and experiences constant returns to scale as a result, his long-run average total cost curve should be:

Accepted Answer

Under constant returns to scale, the LRATC curve is horizontal, indicating that average cost is constant regardless of the scale of production.

Question 15

Steve owns a bike store. Last year his average cost of selling a bike was $1,000. If he expands the size of his store this year and sees his average cost decrease to $950, his long-run average total cost curve should be:

Accepted Answer

When Steve expands the size of his store and sees his average cost decrease, this suggests that he is experiencing economies of scale. As he produces at a larger scale, he benefits from advantages such as bulk purchases of materials and more efficient production processes. As a result, his long-run average total cost curve should be downward-sloping, indicating that his average cost per bike decreases as he produces more bikes.

Question 16

If a firm experiences gains from specialization as it increases its scale of production, we would expect its long-run average cost curve to be:

Accepted Answer

Gains from specialization typically lead to lower costs per unit of output, meaning the long-run average cost curve would be expected to slope downward as production scales up.

Question 17

If a firm adds multiple layers of management as it increases its scale of production, thus adding to its costs, we would expect its long-run average cost curve to be:

Accepted Answer

When a firm adds multiple layers of management as it increases its scale of production, it increases its costs, as each additional layer of management adds to the overall cost of production. Therefore, we would expect the firm's long-run average cost curve to be upward-sloping.

Question 18

If a firm experiences diseconomies of scale, its long-run average cost curve is:

Accepted Answer

Diseconomies of scale occur when a firm becomes too large and inefficient, leading to an increase in long-run average costs. This would cause the long-run average cost curve to slope upward.

Question 19

Darrell owns a furniture store. If he moves into a larger store but finds that his average costs have increased in the long run, we know that Darrell is experiencing:

Accepted Answer

When a business moves to a larger scale, it is expected to experience economies of scale, where the average costs decrease due to increased efficiency. However, if the average costs increase in the long run, it indicates that the business is facing diseconomies of scale, which may be due to factors such as communication problems or increased bureaucracy.

Question 20

Darrell owns a furniture store. If he increases the size of his furniture store and experiences diseconomies of scale as a result, his long-run average total cost curve should be:

Accepted Answer

If Darrell experiences diseconomies of scale, it means that as he increases production, his long-run average total cost will increase at an increasing rate. This would result in an upward-sloping long-run average total cost curve.

Quiz 8: Business Costs and Production