7.4 Costs in the Long Run

Which description best fits the definition of diseconomies of scale?

the situation in which the long-run average cost of producing each individual unit increases as total output increases; By definition, diseconomies of scale occur when the long-run average cost of producing each individual unit increases as total output increases.

In which of the following scenarios will economies of scale occur?

when the LRATC decreases as quantity increases; Economies of scale refers to the situation where, as the quantity of output goes up, the cost per unit goes down. The economies of scale curve is a long-run average cost curve, because it allows all factors of production to change. As long-run average cost is decreasing and quantity is increasing, economies of scale are occurring.

When the long-run average cost (LRAC) _________ as output increases, a firm is experiencing ________ of scale.

increases; diseconomies; By definition, diseconomies of scale occur when LRAC increases as the firm expands its output.

If a firm is experiencing economies of scale in its production process, which of the following will occur when the firm increases its output?

its long-run average total costs will fall; By definition, a firm is said to experience economies of scale when long-run average cost declines as the firm expands its output.

Company ABC has determined that their lowest total cost production technology is $300. If machines cost $50 and workers cost $30 how many machines produce this cost of production if the company has already determined it will hire 5 workers?

3 machines; We know that Company ABC has determined the lowest cost of technology to be 300 and has already hired 5 workers. Therefore $300 = (# of workers×$30) + ( # of machines × $50) $300 = (5×$30) + (# of machines×$50) $150 = # of machines×$50 $150/$50 = 3 machines

Consider the following table showing two possible production technologies that can be used to staff the reception desk at a doctor's office. Live receptionists can check-in clients or computers can be used for clients to self-check-in. If the cost of receptionists is $150 per worker per day, and the cost of computers is estimated at $80 per computer, what is the number of workers that minimizes the firm's cost of production?

3 workers; First, we notice from the table that Production technology A is the lower cost technology. Therefore, we have to determine how many workers at $150 per worker will have to be added to the cost of capital to yield a total cost of $610. If the number of workers is X, then X∗$150+2∗$80=$610. We solve for X and find that X=3, i.e. three workers will be chosen in the lower cost technology.

Consider the following table showing two possible production technologies that can be used to produce a clothing line. If the cost of workers s is $90 per worker per day, and the cost of machines is $120 per machine per day, what is the number of machines that minimizes the firm's cost of production?

4 machines; First, we want to determine which of the two technologies minimizes cost of production. We calculate total cost by summing Cost of capital and Cost of Labor as in the last column of the below table. Production technology A is chosen. We then determine from the cost of capital being $480 that four machines were used.

Each of the following production technologies produces the same quantity of output. Which of the following is the lowest-cost production technology if machines cost $50 and workers cost $70?

4 workers, 7 machines; Find the cost of each production technology by multiplying each worker or machine by its cost and adding these values together. The lowest-cost production technology is 4 workers and 7 machines with a total cost of $630.

True or false?A firm is facing constant returns to scale if its total cost of production does not change with increases in output produced.

False; Constant returns to scales is when the firm's average cost of production does not change with increases in output produced.

True or false? Diseconomies of scale can be represented by the portion of the long-run average cost curve with a downward slope.

False; Diseconomies of scale can be represented by the portion of the long-run average cost curve with an upward slope.

True or false? The shape of the long-run average cost curve determines the number and size of firms competing in the industry.

True; The shape of the long-run average cost curve determines the amount of firms competing in an industry as well as the size of the firms. A LRAC curve with a clear minimum point does not allow for many firms to compete, but a flat-bottomed LRAC curve does.

CompTEX has determined that their lowest total cost production technology is $630. Each production technology produces the same quantity of output. If machines cost $50 and workers cost $70 what combination of workers and machines produces this cost of production if CompTEX has already determined it will purchase 7 machines?

We know that CompTEX has determined the lost cost of technology to be $630 and has already purchased 7 machines. Therefore, $630 = (# of workers×$70) + ( # of machines×$50) $630 = (# of workers×$70) + (7×$50) $630 = (# of workers×$70) + $350 $280 = (# of workers×$70) $280/$70 = 4workers

Which of the following occurs when the long-run average cost of producing each individual unit increases as total output increases?

diseconomies of scale; By definition, diseconomies of scale occur when the long-run average cost of producing each individual unit increases as total output increases.

The long-run average cost curve is typically _______________________.

downward-sloping at first but then upward-sloping; The long-run average cost curve is typically U shaped. Initially, the economies of scale are causing the downward slope. At a much higher level of production, the diseconomies of scale make it upward sloping.

Which of the following explains a firm's output when the long-run average cost curve has a flat bottom?

firms are able to produce at a variety of output levels along the flat bottom of the curve.; When the LRAC curve has a flat bottom, firms producing at any quantity along the flat bottom can compete because costs remain low.

The long-run average cost (LRAC) curve is actually based on a group of ______________, each of which represents one specific level of fixed costs.

short-run average cost curves; The long-run average cost (LRAC) curve is actually based on a group of short-run average cost (SRAC) curves, each of which represents one specific level of fixed costs. More precisely, the long-run average cost curve will show the least expensive average total cost for any level of output.

When do constant returns to scale occur?

when the LRATC remains constant as quantity increases; Constant returns to scale refers to a situation where average cost does not change as output increases. In the middle portion of the long-run average cost curve, the flat portion of the curve, economies of scale have been exhausted. In this situation, allowing all inputs to expand does not much change the average cost of production. We call this constant returns to scale.