Question 1

Distinguish between technical and pecuniary economies of scale.

Accepted Answer

The answer of Distinguish between technical and pecuniary economies of...

Question 2

Both short-run and long-run costs will decrease if the price of factor income increases.

Accepted Answer

A) True 
 B)False

Question 3

What is the shape of the LRAC curve for a firm enjoying economies of scale?

Accepted Answer

The answer of What is the shape of the LRAC...

Question 4

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.
 
-Refer to the information above to answer this question.How much is total fixed cost in Plant 2?

Accepted Answer

A) $2,000. 
B) $4,500. 
C) $9,000. 
D) $15,000. 
E) $24,500.

Question 5

State whether each of the following is a short-run or long-run adjustment
a)A firm hires two more workers
b)A firm builds a new plant
c)A pizza parlor decides to add more pepperoni on their signature pizza.
d)A restaurant expands its kitchen

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

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.
 
-Refer to the information above to answer this question.What is the total cost of producing an output of 60 in Plant 2?

Accepted Answer

A) $7,000. 
B) $9,000. 
C) $15,000. 
D) $24,500. 
E) $30,000.

Question 7

The right size of firm is determined by the minimum point on its short-run average cost curve.

Accepted Answer

A) True 
 B)False

Question 8

The existence of both economies of scale and diseconomies of scale would have what effect on the LRAC curve?

Accepted Answer

A) It would make it upward-sloping. 
B) It would make it downward-sloping. 
C) It would give it an inverse U shape. 
D) It would give it a U shape. 
E) It would make it horizontal.

Question 9

What is the effect of diseconomies of scale?

Accepted Answer

A) The short-run average cost curve falls. 
B) The short-run average cost curve rises. 
C) The long-run average cost curve falls. 
D) The long-run average cost curve rises.

Question 10

Suppose that a firm,operating efficiently,doubles the size of its operations and discovers that,as a result,its average cost of production has increased.What does this imply?

Accepted Answer

A) Decreasing returns to scale are present. 
B) Increasing returns to scale are present. 
C) Constant returns to scale are present. 
D) No conclusion about returns to scale can be made.

Question 11

-Refer to the graph above to answer this question.Suppose that the firm is producing an output between Q1 and Q2.All of the following statements,except one,are correct.Which is the exception?

Accepted Answer

A) The firm is neither too large nor too small. 
B) The firm is certainly achieving economic capacity. 
C) The firm might or might not benefit by increasing or decreasing its output. 
D) The firm could not benefit by increasing or decreasing its scale of plant.

Question 12

Demonstrate graphically and explain verbally the concepts of economies of scale,constant return to scale,and diseconomies of scale.

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Question 13

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

Question 14

Table 7.2 contains long-run cost data for three different firms.Is each of these firms experiencing economies,diseconomies or constant returns to scale?
Table 7.2

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The answer of Table 7.2 contains long-run cost data for...

Question 15

-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 16

Suppose it takes 30 workers and 120 units of capital to produce 300 trucks a day.How much labour and capital is involved in producing 900 trucks a day if the firm experiences constant returns to scale?

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Question 17

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 18

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.
 
-Refer to the information above to answer this question.What comment can be made in reference to returns to scale between Plants 1 and 2?

Accepted Answer

A) Constant returns to scale are present. 
B) Increasing returns to scale are present. 
C) Decreasing returns to scale are present. 
D) Diminishing marginal returns are present.

Question 19

Suppose prices and technologies are held constant.State whether each of the following scenarios shows increasing returns to scale,constant returns to scale or decreasing returns to scale.
a)Percentage change input is greater than the percentage change in output.
b)Percentage change input is equal to the percentage change in output.
c)Percentage change input is less than the percentage change in output.

Accepted Answer

The answer of Suppose prices and technologies are held constant.State...

Question 20

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.

Exam 7: Costs in the Long Run