Question 1

Which of the following best describes the difference between the short run and the long run in production decisions?

Accepted Answer

In the short run, at least one input is fixed, while in the long run, all inputs can be varied.

Question 2

Suppose a wireless earbud manufacturer increases the number of workers while keeping the size of its factory and equipment constant. Initially, output rises rapidly, but after a certain point, each additional worker adds less to total output than the previous one. Which economic principle does this illustrate?

Accepted Answer

Law of diminishing marginal product

Question 3

A firm’s total cost ($$TC) is $$given by $$TC = TFC + TVC. If $$total fixed costs ($$TFC) $$are $$\500$ and total variable costs ($$TVC$$) are $$\$$1,200 at a $$certain output level, what is the average total cost ($$ATC) if 100 $$units are produced?

Accepted Answer

$$ATC = \frac{TFC + TVC}{Q} = \frac{500 + 1,200}{100} = 17$$

Question 4

If the marginal cost ($$MC) of $$producing an additional unit is less than the average variable cost ($$AVC$$), what will happen to the $$AVC as $$output increases?

Accepted Answer

$$AVC$$ will fall

Question 5

Which of the following is NOT a reason for economies of scale in the long run?

Accepted Answer

Increasing marginal product of labor in the short run

Question 6

A firm’s marginal cost ($$MC) $$curve initially slopes downward and then upward. What explains this shape?

Accepted Answer

The law of diminishing marginal product

Question 7

Suppose a firm’s total fixed cost ($$TFC) $$increases, but total variable cost ($$TVC) $$and output remain unchanged. Which of the following will occur?

Accepted Answer

The average fixed cost ($$AFC) $$curve shifts upward

Question 8

If a firm is operating at the minimum point of its long-run average cost curve, what does this imply?

Accepted Answer

The firm is producing at the minimum efficient scale

Question 9

Which of the following best describes the concept of minimum efficient scale ($$MES$$)?

Accepted Answer

The lowest rate of output at which long-run average costs are minimized

Question 10

A firm in the digital services industry finds that as it hires more workers, each worker has less equipment to use, and the marginal product of labor eventually becomes negative. What is this point called?

Accepted Answer

Point of saturation

Question 11

If a firm’s long-run average cost curve is downward sloping as output increases, what is the firm experiencing?

Accepted Answer

Economies of scale

Question 12

Which of the following is a likely cause of diseconomies of scale?

Accepted Answer

Coordination and communication problems in large firms

Question 13

Suppose a firm’s marginal cost ($$MC) is $$rising and is above the average total cost ($$ATC). $$What will happen to the $$ATC as $$output increases?

Accepted Answer

$$ATC$$ will rise

Question 14

A firm’s production function is best described as:

Accepted Answer

The relationship between inputs and maximum output

Question 15

If the average fixed cost ($$AFC) at an $$output of 50 units is $$\10$, what is the total fixed cost ($$TFC$)?

Accepted Answer

$$TFC = AFC 	imes Q = 10 	imes 50 = 500$$

Question 16

Which of the following statements about the relationship between marginal product and marginal cost is correct?

Accepted Answer

As marginal product rises, marginal cost falls

Question 17

A small minimum efficient scale ($$MES) $$relative to industry demand implies:

Accepted Answer

Room for many efficient firms and high competition

Question 18

Which cost curve is NOT typically U-shaped in the short run?

Accepted Answer

Average fixed cost ($$AFC)$$

Question 19

A firm’s average variable cost ($$AVC) is$$ $$\8$ and average fixed cost ($$AFC$$) is $$\$$2 at a $$certain output level. What is the average total cost ($$ATC$$)?

Accepted Answer

$$ATC = AVC + AFC = 8 + 2 = 10$$

Question 20

Which of the following best explains why the long-run average cost curve is U-shaped?

Accepted Answer

Because of economies of scale at low output and diseconomies of scale at high output

The Firm: Cost and Output Determination – Study Notes

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