question
What does the minimum efficient scale measure?
answer
The smallest output level at which long-run average total cost is minimized.
Why? The minimum efficient scale is the lowest quantity of output at which long-run average total cost is at its minimum.
Why? The minimum efficient scale is the lowest quantity of output at which long-run average total cost is at its minimum.
question
Suppose a firm's production process exhibits diseconomies of scale. How and why will costs change if the firm reduces its output?
answer
Long-run average total cost will decrease because it becomes easier for the firm to manage its workforce.
Diseconomies of scale occur as a result of the difficulty to manage firms as their scale of production increases causing unnecessarily high costs as many layers of management try to communicate with workers and with each other, and as failures to communicate lead to disruptions in the flow of work and materials. With diseconomies of scale, the long-run average total cost curve is upward sloping or increasing. Thus, if the firm reduces its output, its long-run average total costs will decrease as it will be easier for the firm to manage its workforce.
Diseconomies of scale occur as a result of the difficulty to manage firms as their scale of production increases causing unnecessarily high costs as many layers of management try to communicate with workers and with each other, and as failures to communicate lead to disruptions in the flow of work and materials. With diseconomies of scale, the long-run average total cost curve is upward sloping or increasing. Thus, if the firm reduces its output, its long-run average total costs will decrease as it will be easier for the firm to manage its workforce.
question
If the output of a firm doubles when the firm doubles all of its inputs, the firm must be experiencing
answer
constant returns to scale
question
The table below shows the long-run total cost function of a firm.
Quantity of Output. Total Cost($)
0 0
1 10
2 20
3 30
4 40
5 50
The firm's cost function exhibits.....
Quantity of Output. Total Cost($)
0 0
1 10
2 20
3 30
4 40
5 50
The firm's cost function exhibits.....
answer
constant returns to scale
question
Economies of scale can be illustrated by
answer
a decreasing long-run average total cost curve as a firm produces more output
question
Which of the following is a result of increasing returns to scale?
answer
Downward-sloping long-run average total cost curve
question
If a firm experiences economies of scale over the entire range of output, the long-run average cost curve will be...
answer
downward sloping
why? Economies of scale occur when the long-run average total cost of producing each individual unit declines as total output increases. This is illustrated by a downward sloping long-run average cost curve.
why? Economies of scale occur when the long-run average total cost of producing each individual unit declines as total output increases. This is illustrated by a downward sloping long-run average cost curve.
question
Which of the following must be true if a firm is experiencing economies of scale?
answer
Long-run average total cost decreases as the firm's output increases.
question
If a firm is experiencing economies of scale, which of the following will decrease as output increases?
answer
Long-run average total cost
question
F&D Manufacturing Company increases all its inputs by 50 percent each. If F&D's output increases by 100 percent, then F&D is experiencing
answer
increasing returns to scale
question
A farmer grows wheat using two inputs: labor and land whose prices are constant. If she doubles her inputs, she finds that the quantity of wheat produced more than doubles. Therefore, it must be true that in this output range her long-run average total cost curve is
answer
downward sloping
question
Currently, XYZXYZ Corporation can produce 50 units of output using 20 workers and 8 units of capital. Which of the following changes in the number of workers, units of capital, and quantity of output are consistent with constant returns to scale?
answer
Workers: 10
Capital: 4
Output: 25
Returns to scale is a long-run concept that describes what happens to output when all inputs are increased or decreased by the same proportion. With constant returns to scale, proportional changes in all inputs result in an equal proportional increase in output. A change of 10 workers, 4 units of capital and 25 units of output is consistent with constant returns to scale, because the amount of inputs changed by 50 percent each (i.e., the number of workers changed by 10 from 20 and the units of capital changed by 4 from 8), and the amount of output also changed by 50 percent (i.e., a change of 25 units of output from 50).
Capital: 4
Output: 25
Returns to scale is a long-run concept that describes what happens to output when all inputs are increased or decreased by the same proportion. With constant returns to scale, proportional changes in all inputs result in an equal proportional increase in output. A change of 10 workers, 4 units of capital and 25 units of output is consistent with constant returns to scale, because the amount of inputs changed by 50 percent each (i.e., the number of workers changed by 10 from 20 and the units of capital changed by 4 from 8), and the amount of output also changed by 50 percent (i.e., a change of 25 units of output from 50).
question
The graph above shows a firm's long-run average total cost curve (LRATC). Which of the following statements is true as the firm increases its scale of production?
cost
' ' LRATC
\ /
\ /
\__________________________________/
| | Quantity
| |
Q0. Q1
Output
cost
' ' LRATC
\ /
\ /
\__________________________________/
| | Quantity
| |
Q0. Q1
Output
answer
For output levels above Q1Q1, the firm experiences diseconomies of scale.
When LRATC is rising, above Q1Q1, the firm experiences diseconomies of scale.
When LRATC is rising, above Q1Q1, the firm experiences diseconomies of scale.
question
If a firm's long-run average total cost increases as output increases, the firm is experiencing
answer
diseconomies of scale
question
The table above shows the various units of output that can be produced with different combinations of capital and labor. Which of the following statements is correct according to the information in the table?
Units of Output
Units of Labor | Units of Capital
| 1 2 3
1 | 100 140 160
|
2 | 140 200 240
|
3 |. 160. 240 300
Units of Output
Units of Labor | Units of Capital
| 1 2 3
1 | 100 140 160
|
2 | 140 200 240
|
3 |. 160. 240 300
answer
In the long run, there are constant returns to scale.
question
A merger of two firms may increase economic efficiency by
answer
decreasing average total cost through an increase in economies of scale
question
Assume a firm doubles its usage of each input, resulting in a doubling of the firm's output. Which of the following describes this result?
answer
Constant returns to scale
Why? When all inputs change by the same proportion and output changes by that same proportion, there are constant returns to scale.
Why? When all inputs change by the same proportion and output changes by that same proportion, there are constant returns to scale.
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