Question 1

Suppose that a firm's output increases from 500 to 1,000 units and its total cost increases from $50,000 to $100,000, and if the price of inputs and technology remain unchanged, calculate the change in average total cost and state whether constant returns to scale, economies of scale or diseconomies of scale exist in this case.

Accepted Answer

A)  Increase of $100 and economies of scale 
B)  Increase of $100 and diseconomies of scale 
C)  Increase of $100 and constant returns to scale 
D)  No change and constant returns to scale

Question 2

The long-run average cost curve declines continuously as output levels increase.

Accepted Answer

A) True 
 B)False

Question 3

A firm's economic capacity and its most productive output level are the same.

Accepted Answer

A) True 
 B)False

Question 4

Table 7.1 contains short-run cost date for four different plants sizes for Jackson's Jazz Instruments. $$\begin{array}{l}
\text { Table } 7.1\
\begin{array} { c c c c c } 
\hline \text { Output } & \text { Plant 1 } & \text { Plant 2 } & \text { Plant } 3 & \text { Plant 4 } \
\hline 100 & 90 & 95 & 100 & 130 \
200 & 70 & 80 & 90 & 115 \
300 & 90 & 65 & 70 & 90 \
400 & 110 & 80 & 60 & 70 \
500 & 130 & 95 & 70 & 55 \
600 & 150 & 125 & 80 & 65 \
\hline
\end{array}
\end{array}$$ a) What is the best size of plant for each of the following level of output?
i. 200
ii. 300
iii. 400
iv. 500
b) Is Jackson's Jazz Instruments experiencing economies, diseconomies, or constant return to scale?

Accepted Answer

The answer of Table 7.1 contains short-run cost date for...

Question 5

The long run is the circumstance in which at least one input is variable.

Accepted Answer

A) True 
 B)False

Question 6

Below are some cost data pertaining to Plant 1, which has total fixed costs of $1,000. Suppose that Plant 2 is exactly twice the size of Plant 1 while using (at economic capacity) twice the amount of labour and materials, and that it produces exactly twice the output. Further, assume that the prices of these inputs do not change.
 $$\begin{array} { l c } 
\text { Output } & \text { \$AC: Plant 1 } \
10 & 200 \
20 & 175 \
30 & 150 \
40 & 175 \
50 & 200 \
60 & 250 \
70 & 350
\end{array}$$
-Refer to the information above to answer this question. What is the output produced if the total cost in Plant 2 is $14,000?

Accepted Answer

A)  10. 
B)  20. 
C)  30. 
D)  40. 
E)  80.

Question 7

What is meant by the term "economic capacity"?

Accepted Answer

A)  The output level at which the firm is physically unable to increase output. 
B)  The output level at which average variable cost is at a minimum. 
C)  The output level at which average total cost is at a minimum. 
D)  The output level at which marginal cost is at a minimum.

Question 8

What is the likely cause of a firm operating below MES?

Accepted Answer

The answer of What is the likely cause of a...

Question 9

What is meant by the term economic capacity?

Accepted Answer

A)  An output level where the firm is physically unable to increase output. 
B)  The output level where average variable cost is at a minimum. 
C)  The output level where average total cost is at a minimum. 
D)  Total fixed costs are at a minimum.

Question 10

State whether each of the following scenarios shows economies of scale or diseconomies of scale.
a) Increase firm size leads to greater problems in communication between the firms major stakeholders.
b) Increase firm size creates coordination problems among departments.
c) Increase firm size leads to greater specialization of management.
d) Increase firm size enables greater division of labour.

Accepted Answer

The answer of State whether each of the following scenarios...

Question 11

Economies of scale are divided into those cost advantages that are technical and those that are pecuniary.

Accepted Answer

A) True 
 B)False

Question 12

-Refer to the graph above to answer this question. Can this firm produce an output of 200 at an average total cost of $40?

Accepted Answer

A)  Yes, and that output would be economic capacity. 
B)  Yes, but production would be inefficient. 
C)  No, this combination is unobtainable given present resource prices and the current state of technology. 
D)  No, this combination would be unobtainable because production is inefficient.

Question 13

Below is short-run cost data for four different plant sizes. Plant 2 has exactly twice as many inputs as does Plant 1. Plant 3 has exactly three times as many inputs as does Plant 1 and Plant 4 has exactly four times as many inputs as does Plant 1.
 $$\begin{array} { c c c c c } 
\text { Output } & \text { \$ AC: Plant 1 } & \text { \$ AC: Plant 2 } & \text { \$ AC: Plant 3 } & \text { \$ AC: Plant 4 } \
5 & 12 & 14 & 15 & 15.25 \
10 & 11 & 13 & 13.75 & 14.25 \
15 & 12 & 12 & 12.75 & 14 \
20 & 14 & 11 & 12 & 13 \
25 & 17 & 12 & 11.50 & 12.20 \
30 & 21 & 13 & 11 & 11.70 \
35 & 26 & 14 & 11.50 & 11.30 \
40 & 32 & 17 & 12 & 11 \
45 & 39 & 21 & 12.75 & 11.30 \
50 & 47 & 25 & 13.75 & 11.70
\end{array}$$ 
-Which of the following statements is correct if a firm's capacity output increases from 300 to 600 and its total costs rise from $40,000 to $78,000?

Accepted Answer

A)  The firm is experiencing constant returns to scale. 
B)  The firm is experiencing decreasing returns to scale. 
C)  The firm is experiencing increasing returns to scale. 
D)  The firm's long-run average cost must have decreased but its short-run average cost could have either decreased or increased.

Question 14

What is true if decreasing returns to scale are present?

Accepted Answer

A)  Average fixed cost will rise. 
B)  Total variable cost will fall. 
C)  Economies of scale are also present. 
D)  Diseconomies of scale are present.

Question 15

The ability of a person to supervise 12 workers just as well as 8 is an example of:

Accepted Answer

A)  The division of labour. 
B)  Labour specialization. 
C)  Management specialization. 
D)  Decreasing returns to scale.

Question 16

What does MES refer to?

Accepted Answer

A)  The marginal efficient size of a firm 
B)  The biggest-size plant that is capable of achieving economies of scale. 
C)  The biggest-size plant that is capable of achieving diseconomies of scale 
D)  The smallest-size plant that is capable of achieving diseconomies of scale 
E)  The smallest-size plant capable of achieving the lowest long-run average cost of production.

Question 17

-Refer to the graph above to answer this question. Could this firm produce an output of 200 at an average total cost of $20?

Accepted Answer

A)  Yes, and that output is economic capacity. 
B)  Yes, but production would be inefficient. 
C)  No, this combination would be unobtainable given present resource prices and the current state of technology. 
D)  No, this combination is unobtainable because production would be inefficient.

Question 18

Refer to the graph above to answer this question. All of the following statements, except one, are correct. Which is the exception?

Accepted Answer

A)  Firms that produce an output less than Q1 are too small. 
B)  Firms that produce an output which greater than Q2 are too large. 
C)  Firms that produce output Q2 are achieving MES. 
D)  Firms that produce an output which is between Q1 and Q2 are neither too large nor too small. 
E)  Firms that produce an output which is less than Q1 cannot be achieving economic capacity.

Question 19

If we know that a firm is experiencing diseconomies of scale, which of the following statements is true?

Accepted Answer

A)  The firm is operating on the upward-sloping segment of its LRAC curve. 
B)  The firm is experiencing increasing returns to scale. 
C)  Both pecuniary and technical economies of scale must be present. 
D)  If all inputs were increased by 10% then output would rise by more than 10%. 
E)  The firm is also experiencing diminishing marginal returns.

Question 20

Suppose that a firm's output increases from 500 to 600 units and its total cost increases from $50,000 to $72,000, and if the price of inputs and technology remain unchanged, calculate the change in average total cost and state whether constant returns to scale, economies of scale or diseconomies of scale exist in this case.

Accepted Answer

A)  Increase of $20 and economies of scale 
B)  Increase of $20 and diseconomies of scale 
C)  Increase of $20 and constant returns to scale 
D)  No change and constant returns to scale

Exam 7: Costs in the Long Run

The long-run average cost curve declines continuously as output levels increase.

A firm's economic capacity and its most productive output level are the same.

The long run is the circumstance in which at least one input is variable.

What is meant by the term "economic capacity"?

What is the likely cause of a firm operating below MES?

What is meant by the term economic capacity?

Economies of scale are divided into those cost advantages that are technical and those that are pecuniary.

-Refer to the graph above to answer this question. Can this firm produce an output of 200 at an average total cost of $40?

What is true if decreasing returns to scale are present?

The ability of a person to supervise 12 workers just as well as 8 is an example of:

What does MES refer to?

-Refer to the graph above to answer this question. Could this firm produce an output of 200 at an average total cost of $20?

Refer to the graph above to answer this question. All of the following statements, except one, are correct. Which is the exception?

If we know that a firm is experiencing diseconomies of scale, which of the following statements is true?