ECO101H1 Lecture 13: Production and Cost Schedules Cont.

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Firm"s long run atc schedule: in short run, gm must hire more workers to increase output ( law of diminishing returns applies, in long run, gm can build more assembly plants as well as hire more workers. Mp does not necessarily fall after some point. Short run (there is a fixed fixed factor of production): atc is u-shaped. Long run (no fixed factor) atc is not necessarily u-shaped. Atc = afc + avc: afc [=tfc/q] continuously falls as q increases, avc [=tvc/q] eventually rises as q increases since mc eventually rises as q increases [due to law of diminishing returns] Remember: in the short run, there is a fixed factor of production. Long run atc: lowest atc for producing each level of output [efficient production, may at first exhibit economies of scale and, later, diseconomies of scale [see text, figure.

Related Questions

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

a) rising long-run average cost curve.

b) falling long-run average cost curve.

c) constant long-run average cost curve.

d) rising, then falling, then rising long-run average cost curve.

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

a) economies of scale.

b) constant returns to scale.

c) diseconomies of scale.

d) a violation of the law of diminishing returns.

38) 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:

a) economies of scale.

b) normative economies.

c) diminishing marginal returns.

d) an increasing marginal product of labor.

39) 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:

a) economies of scale.

b) constant returns to scale.

c) diseconomies of scale.

d) increasing the average total costs.

40) Economies and diseconomies of scale explain why the:

a) short-run average fixed cost curve declines so long as output increases.

b) marginal cost curve must intersect the minimum point of the firm's average total cost curve.

c) long-run average total cost curve is typically U-shaped.

d) short-run average variable cost curve is U-shaped.

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Q1. Average total cost is equal to
a. AFC + AVC
b. AFC/total output
c. AFC/AVC
d. AVC/AFC

Q2. As output increases, the ATC
a. increases
b. decreases
c. remains constant
d. falls and then rises

Q3. Total profit is equal to
a. total revenue minus total cost
b. total revenue minus explicit cost
c. total revenue minus variable cost
d. total revenue minus marginal cost

Q4. Marginal cost crosses the
a. AVC curve at the highest point of the AVC curve
b. ATC curve at the lowest point of the ATC curve
c. AFC curve at the lowest point of the AFC curve
d. ATC curve at the highest point of the ATC curve

Q5. Wages paid are an example of an explicit cost of doing business.
a. true
b. false

Q6. Any revenue over and above total cost is labeled economic profit.
a. true
b. false

Q7. If the selling price of a product is $10, the average total cost is $8, and total sales are 5,000 units, the total profit will be
a. $5,000
b. $8,000
c. $10,000
d. $20,000

Q8. Whenever marginal revenue exceeds marginal cost,
a. profit declines if output increases
b. profit increases if output increases
c. losses increase if output increases
d. marginal revenue must be rising

Q9. Under perfectly competitive conditions, marginal revenue is
a. greater than average revenue
b. equal to average revenue
c. less than average revenue
d. equal to the average variable

Q10. A firm's break-even point occurs where
a. marginal revenue equals marginal cost
b. marginal revenue equals average variable cost
c. total revenue equals total cost
d. total revenue equals total variable cost

Q11. The addition to total output resulting from using one more unit of a productive resource is the
a. average product
b. marginal input
c. total product
d. marginal product

Q12. Unlike a firm in pure competition, a monopolist may be able to
a. block the entry of new firms into the industry
b. continue to earn economic profits in the long run
c. earn economic profits in the short run
d. both (a) and (b)

Q13. Producer surplus is the difference between the price the firm is willing to sell its goods and the price it actually receives.
a. true
b. false

Q14. In the long run, under conditions of perfect competition, market forces come into play to
a. enhance profits
b. increase demand
c. eliminate profits
d. separate MR and AR

Q15. Consumer surplus is the area above the demand curve and below the equilibrium price.
a. true
b. false

Q16. Under perfect competition, market price is determined by market demand and supply.
a. true
b. false

Q17. The more that firms advertise, the closer they get to perfect competition.
a. true
b. false

Q18. Perfect competition assumes that a producer is interested in maximizing profit.
a. true
b. false

Q19. In the long run, under conditions of perfect competition, the buyer will eventually be able to buy the product at a
a. price equal to the lowest point on the ATC curve past the optimal scale of operation
b. price below cost
c. price equal to the lowest point on the ATC curve at the optimal scale of operation
d. discount

Q20. The lowest possible ATC curve is attained at the optimal scale of output.
a. true
b. false

3. A firm has a long-run production function:

(a) In the short run, K = 81 is fixed. Find the short-run production function. What is the marginal product of labor in the short-run?

(b) If w = 10 and r = 15.24, find the short-run cost function. To do this, first, figure out how many workers are needed to produce Q units of output, and then add up the (fixed) SR cost of capital and the cost of labor as a function of Q. How many workers are needed to produce Q = 10?

(c) Write down equations for an average total cost (ATC) and average variable cost (AVC) as a function of Q. What is ATC when Q = 10? What as AVC when Q = 10?

(d) Write down the equation for the marginal cost (MC) as a function of Q. What is the marginal cost of producing Q = 10 in the short run?

(e) Verify that MC = w*MPL, evaluating the marginal product of labor from part (3a) at the number of workers needed to produce 10 units of output.

(f) In the long run, both capital and labor are variable. Find the marginal product of labor and the marginal product of capital. Find the marginal rate of technical substitution. On a properly-labeled graph, draw an isoquant for Q = 10.

(g) Does the production function exhibit increasing, decreasing, or constant returns to scale?

(h) Find the lowest cost method of producing Q = 10 (two unknowns: K and L). To do this, equate the MRTS with the input price ratio w r (one equation) and use the isoquant for Q = 10 as the second equation.

(i) Use the fact that the cost, in the long run, is wL + rK to find the LR cost of producing Q = 10. What is the long-run average cost (LRAC) at Q = 10?

(j) (Hard) More generally, use the MRTS and the production function to find the cost of producing any quantity Q. To do this, repeat the above exercise but keep Q as an (unknown) variable, and solve for K and L as functions of Q.

(k) On a properly labeled graph, depict ATC from part (3b) and LRAC from part (3j). Why is LRAC everywhere below ATC?

(l) What is the production level at which SRAC is minimized?

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ECO101H1 Lecture 13: Production and Cost Schedules Cont.

ECO101H1 Full Course Notes

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