1. If the long-run average cost curve is flat over a large range of output, we s
ID: 1227113 • Letter: 1
Question
1. If the long-run average cost curve is flat over a large range of output, we say that the firm
a. is experiencing economies of scale.
b. is experiencing diseconomies of scale.
c. faces constant returns to scale.
d. faces diminishing marginal product.
2 Diminishing returns affect all of the following except
a. marginal product.
b. average total cost.
c. average variable cost.
d. average fixed cost.
3. If Julia knows the average total cost of baking 12 dozen muffins is $6 and the average total cost of producing 13 dozen muffins is $7, then the marginal cost of producing the 13th dozen muffins is
a. $1.
b. $13.
c. $19.
d. $31.
4. Ian’s fixed cost of mowing lawns is $250 and his marginal cost is constant at $10 per lawn. If Ian mows 5 lawns in one day, what is Ian’s average total cost?
a. $25
b. $50
c. $60
d. $300
5. If the marginal cost curve is above the average total cost curve,
a. the average variable cost curve must be falling.
b. the average total cost curve must be rising.
c. the average total cost curve may be at a minimum.
d. none of the above.
Explanation / Answer
1. If the long-run average cost curve is flat over a large range of output, we say that the firm
a. is experiencing economies of scale.
b. is experiencing diseconomies of scale.
c. faces constant returns to scale. (Answer)
d. faces diminishing marginal product.
Explanation
A long run avaerage cost curve is a U-shaped curve though the U is less pronounced than in the short run. This is so because as a firm starts operation it has immense surplus or excess capacity to produce without increasing the fixed cost(as the plant is already in place). So for intial expansion of production, the costs fall leading to a downward sloping cost curve.This is because of the economies of large scale production. Later on, when the production increases manifold, there occur diseconomies of scale meaning that inefficiencies enter into picture. With a vast prodcution unit there occurs managerial inefficiency and new plants need to be set up too, to expand production further. This increases costs. Thus, cost curve slopes upward giving the cost curve a U-shape. If however, with technological advancements, the firm is able to keep the costs to minimum and not let them rise, the AC curve would be flat over a long range and there would be constant returns to scale. Hence the answer.
2 Diminishing returns affect all of the following except
a. marginal product.
b. average total cost.
c. average variable cost.
d. average fixed cost. (Answer)
Explanation
Fixed cost is irrespective of the level of production. It is a one time investment and thus does not change with diminishing returns.
3. If Julia knows the average total cost of baking 12 dozen muffins is $6 and the average total cost of producing 13 dozen muffins is $7, then the marginal cost of producing the 13th dozen muffins is
a. $1.
b. $13.
c. $19.
d. $31.
Explanation
Marginal cost is the total cost incurred in the production of one additional unit of output. Symbologically, it is TC7- TC6= (13X7) - (12X6)= 91-72= 19
4. Ian’s fixed cost of mowing lawns is $250 and his marginal cost is constant at $10 per lawn. If Ian mows 5 lawns in one day, what is Ian’s average total cost?
a. $25
b. $50
c. $60
d. $300
Explanation
Total cost= Fixed cost+ Variable cost
TC= 250 + (5X10)
= 300
5. If the marginal cost curve is above the average total cost curve,
a. the average variable cost curve must be falling.
b. the average total cost curve must be rising.
c. the average total cost curve may be at a minimum.
d. none of the above.
Explanation
If the MC is above ATC it implies that the additional cost incurred in the production of one additional unit of output is greater than the average. If Marginal > Average, the average increases. Thus, the AC will start rising.
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