ECO2314 Chap 11 Q&A

A firm's minimum efficient scale is the largest quantity of output at which long-run average cost reaches its highest level.

False

A firm's total cost in the short run is the sum of its fixed cost plus its variable cost plus its marginal cost.

False

When the marginal product of labor is below the average product of labor, the average product must increase when employment increases.

False (??When the marginal product of labor is below the average product of labor, the average product must DECREASE when employment increases.) http://academic.udayton.edu/PMIC/Quizzes/micro%20quiz4.pdf

The marginal cost curve intersects the average fixed, average variable, and average total cost curves all at their minimum points.

False (MC only cuts ATC & AVC at min, not AFC)

When there are diminishing marginal returns to labor, the marginal product of the last worker hired must be negative.

False (it can be negative, but not MUST)

The vertical distance between the average variable cost curve and the average total cost curve equals average fixed cost.

True

Decisions abt the Q to produce and the P to charge

depend on the type of market in which the firm operates

Decisions about how to produce a given output

do not depend on type of market; all types of firms in all types of markets make similar decisions

To increase output in the long run

firm can change its plant as well as Q of labor

When a firm is producing a given output at the least possible cost

it is operating on its long-run average cost curve

Variable factor of production

labor

Relationship b/w total product and total variable cost

same shape, but 1. TP curve: output Q (y-axis) against Labor (x-axis) 2. TVC curve: output Q (y-axis) against Variable Cost (x-axis)

Total product curve

separates the attainable output lvs (right) from those that are unattainable (left). Points below the curve are attainable but inefficient - they use more labor than nieces to produce a given amount. Only points on the total product curve are technologically efficient.

The economically efficient plant for producing a given output is

the one that has the lowest ATC.

Increasing marginal returns

- occur when the marginal product of an additional worker exceeds the marginal product of the prev worker. - arise from increased specialization and division of labor. - eg: if there are 2 workers, they can specialize in diff part and yield more production. MP of the second worker > first worker. MarReturns are increasing.

Average Product curve (AP)

AP increases initially but then decreases as more workers are employed. AP is max when AP = MarP (MP curve cuts AP curve at point of max AP). When MP > AP, AP incr. When MP < AP, AP decr.

Over the range of output for which the marginal product of labor curve is negatively sloped, the marginal cost curve is negatively sloped.

False (MP decr as MC incr)

The term "fixed cost" refers to the cost a firm incurs to produce a specific fixed quantity of output.

False (fixed Q??)

MarCost curve is U-shaped b/c

MC decreases initially and then increases b/c of law of diminishing returns

As labor increases

MarProduct increases initially and then begins to decrease. AveProduct also increases at first and then decreases.

The product curves are graphs of the relationships b/w employment and TP, MP, AP

They show hoe TP, MP, and AP change as employment changes, and relationships among the 3

A firm's long-run average cost curve is derived from a series of short-run average total cost curves.

True

In the short run, average fixed cost is constant as output increases.

True

Marginal cost refers to the increase in cost attributable to hiring one more unit of labor, capital, or some other input.

True

When your current decision is​ rational,

a sunk cost does not influence current decisions, b/c the cost has already been incurred.

The biggest decision that an entrepreneur makes is

in what industry to establish a firm. derived by their background knowledge, interests, and profit expectation

To increase output in the short run

must increase Q of variable factor - labor

Average total cost ATC and average variable cost AVC are U-shaped

the vertical distance b/w them = AFC. it shrinks as output increases b/c AFC decreases as output increases.

Marginal cost curve MC intersects average variable cost curve AVC and average total cost curve ATC at their MIN point

when MC < AC, AC is dereasing. when MC > AC, AC is increasing.

Average fixed cost AFC curve slopes downward

as output increases, the same constant TFC is spread over a larger output

Fixed factor of production / firm's plant

capital, land, entrepreneurship

Technology change that increases productivity (firm using more capital, a fixed factor, and less labor, a variable factor)

- increases MP & AP; shifts Product curves upward - decreases costs; shifts Cost curves downward - relationship b/w P curves and C curves NOT change

Why the average total cost curve is U-shaped

1. ATC = AFC + AVC; combines the shape of both (slope downward + U-shaped) 2. influenced by 2 opposing forces - AFC: spreading total fixed cost over a larger output >> AFC slopes downward - eventually diminishing returns: as Q increases, more labor is needed to produce additional output >> AVC is U-shaped. 3. initially, as output increases, both AFC & AVC decrease, so ATC decreases, curve slopes downward. as output increases further & diminishing returns set in, AVC starts to increase (AFC decr more quickly than AVC incr, then AVC incr more quickly than AFC decr), ATC curve slopes upward.

Production function

1. Diminishing returns / MP of labor: - labor incr, MP of labor eventually diminishes 2. Diminishing MP of capital: - capital incr, MP of capital eventually diminishes

Equations

1. TC = TFC + TVC 2. AFC = TFC / Q AVC = TVC / Q ATC = TC / Q ATC = AFC + AVC 3. MC = (change in TC) / (change in Q)

Short run cost vs Long run cost

1. each short-run ATC is U-shaped: - b/c diminishing returns happen at all capital size 2. for each short-run ATC, the more capital, the greater output at which ATC is at MIN: - b/c more capital, higher TFC and AFC (4 graphs move to the right, slightly up >>>)

Increase in P of a factor of production increases cost and shifts Cost curves

1. increase of fixed cost: shifts the TFV, AFC, & TC upward; leaves AVC, TVC, & MC unchanged 2. increase of variable cost: shifts TVC, AVC, & MC upward; leaves AFC & TFC unchanged

Almost every production process has 2 features

1. increasing marginal returns initially 2. diminishing marginal returns eventually

Shifts in the Cost curve caused by

1. technology 2. prices of factors of production

3 concepts describe the relationship b/w output and cost

1. total cost (TC) 2. marginal cost (MC) 3. average cost (AC)

3 concepts describe the relationship b/w output and Q of labor employed

1. total product (TP) 2. marginal product (MP) 3. average product (AP)

Relationship b/w average and marginal product AP & MP and average and marginal cost AVC & MC (MP and MC; AP and AVC)

1. when L incr, Q incr from A to B: - MP and AP incr, MC and AVC decr - max MP as min MC 2. when L incr, Q incr from B to C: - MP decr, MC incr; AP incr, AVC decr - max AP as min AVC 3. when L and Q incr further: - AP diminishes - AVC incr