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ECON 2 Lecture Notes - Lecture 18: Marginal Cost, Demand Curve, Reservation Price

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School
Irvine Valley College
Department
Economics
Course
ECON 2
Professor
Collinson

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Document Summary

The law of production is as follows: diminishing productivity cannot be escaped; as marginal productivity falls, costs will eventually increase in order to make up for the loss of output. The marginal output falls a the number of employees increases. On a graph, total cost and variable cost would be upward sloping because they rise as the quantity of output is increased. In a short-run situation, many inputs are fixed, such as equipment and capital. But in the long-run scenario, all inputs, including capital, are variable. In the long run, as you increase output by increasing plant size, you move from one short- run average cost curve to the next and eventually trace out a long-run average cost curve. The average fixed cost curve is downward sloping, as output increases, average fixed costs fall. The marginal cost curve hits the average total cost curve at its lowest point.

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Related Questions

A student has just written on an exam that, in the long run, fixed cost will make the average total cost curve slope downward. Why will the professor mark it incorrect?

a) In the long run, there are no fixed costs, meaning the average total cost curve shifts down.

b) In the long run, fixed cost decreases as costs are spread out over a greater quantity of output. Declining fixed cost accounts for the downward-sloping average total cost curve.

c) In the long run, fixed costs increases as firms build new plants and purchase new capital. This means that the average total cost curve will eventually slope upward.

d) In the long run, firms have no fixed cost—all costs are variable. The shape of the long-run average total cost curve is determined by economies of scale.

16) Short-run cost curves are eventually upward-sloping because of the effects of A) the increasing price of variable inputs. B) diminishing marginal product. C) increasing fixed costs. D) increasing marginal productivity of the variable inputs. E) decreasing total product.

TRUE OR FALSE

____ 16. The law of diminishing marginal returns provides an explanation for why Average Cost eventually increases as output is expanded in the short run.

____ 17. The marginal product is the increase in output per additional unit of input.

____ 18. As output increases, marginal cost increases, reaches a maximum, and then falls.

____ 19. The marginal product curve rises when the marginal cost curve rises.

____ 20. If a firm is producing an output level at which marginal revenue exceeds marginal cost in the short run, the firm will increase profits by reducing its output level.