11 - Output and Costs
law of diminishing returns
as a firm uses more of a variable factor of production with a given quantity of the fixed factor of production, the marginal product of the variable factor of production eventually diminishes
True/false: total costs first fall and then, as diminishing returns sets it, total costs rise as the firm expands its outputs.
false: as output increases, total cost always rises.
True/false: economies of scale occur when an increase in the number of workers employed increases total output.
false: economies of scale occur when an increase in output leads to a fall in the average cost.
True/false: the short run is the period of time over which only one factor of production is variable.
false: in the short run, at least one factor of production is fixed.
average product
the average product of a factor of production; equals total product divided by the quantity of the factor employed
total fixed cost
the cost of all the firm's fixed inputs
total variable cost
the cost of all the firm's variable inputs
total cost
the cost of all the productive resources that a firm uses
marginal product
the increase in total product that results from a one-unit increase in the variable input, with all other inputs remaining the same; calculated as the increase in total product divided by the increase in the variable input employed, when the quantities of all other inputs remain the same
total product
the maximum output that a given quantity of labor can produce
marginal cost
the opportunity cost of producing one more unit of a good or service; the best alternative forgone; calculated as the increase in total cost divided by the increase in output
sunk cost
the past expenditure on a plant that has no resale value
True/false: marginal cost equals total cost divided by total output.
false: marginal cost equals the additional total cost divided by the additional output.
True/false: marginal cost is always greater than average total cost.
false: marginal cost usually starts below the average total cost and then rises above it.
True/false: the ATC curve always passes through the minimum point of the MC curve.
false: the MC curve always passes through the minimum point of the ATC curve.
True/false: total variable costs are always greater than total fixed costs.
false: the amount of variable cost and the amount of fixed cost are not necessarily related, except that in the long run all costs are variable costs.
True/false: the average total cost curve, like the average product of labor curve, has an upside-down U shape.
false: the average total cost curve has a "right-side-up" U-shape.
True/false: if the marginal product of another worker exceeds the marginal product of the previous worker hired, the firm is experiencing economies of scale.
false: the firm has increasing marginal returns because only one factor has been changed.
True/false: when the long-run average cost (LRAC) curve slopes upward, the firm is experiencing economies of scale.
false: when the LRAC curve slopes upward, average cost increases when output increases, so over this range of output the firm is experiencing diseconomies of scale.
constant returns to scale
features of a firm's technology that lead to constant long-run average cost as output increases; when constant returns to scale are present, the LRAC curve is horizontal
economies of scale
features of a firm's technology that make average total cost fall as output increases - the LRAC curve slopes downward
diseconomies of scale
features of a firm's technology that make average total cost rise as output increases - the LRAC curve slopes upward
long-run average cost curve
the relationship between the lowest attainable average total cost and output when the firm can change both the plant it uses and the quantity of labor it employs
minimum efficient scale
the smallest quantity of output at which the long-run average cost reaches its lowest level
diminishing marginal returns
the tendency for the marginal product of an additional unit of a factor of production to be less than the marginal product of the previous unit of the factor
long run
the time frame in which the quantities of all factors of production can be varied
short run
the time frame in which the quantity of at least one factor of production is fixed and the quantities of the other factors can be varied; the fixed factor is usually capital - that is, the firm uses a given plant
average total cost
total cost per unit of output
average fixed cost
total fixed cost per unit of output
average variable cost
total variable cost per unit of output
True/false: in the long run, all costs are variable costs and no costs are fixed costs.
true: in the long run, all factors of production can be varied so all costs are variable costs.
True/false: no part of any short-run average total cost curve lies below the long-run average total cost curve.
true: the long-run average cost curve shows the least possible cost to produce any level of output.
True/false: the law of diminishing returns implies that the marginal product of a factor of production eventually falls as more of the factor is used.
true: the question presents the definition of diminishing returns.
True/false: in the long run, all factors are variable.
true: the question presents the definition of the long run.
True/false: if the marginal product of labor exceeds the average product of labor, the average product of labor rises when more workers are hired.
true: this result is a reflection of the relationship between marginals and averages.
True/false: total cost equals fixed cost plus variable cost.
true: total cost is the sum of fixed cost and variable cost.