Week 5

Decreasing marginal cost arises when

(marginal cost falls as the number of units produced increases) often due to learning effects in production: in complicated tasks, workers are often slow and mistake-prone in making the earliest units, making for higher marginal cost on those units // but as workers gain experience, assembly time and the rate of mistakes fall, generating lower marginal cost for later units

Principles that are always true about a firm's marginal and average total cost curves

- At the minimum-cost output, average total cost is equal to marginal cost. -At output less than the minimum-cost output, marginal cost is less than average total cost and average total cost is falling. -And at output greater than the minimum-cost output, marginal cost is greater than average total cost and average total cost is rising

If marginal cost is greater than average total cost, then: A) Average total cost is increasing B) Average total cost is decreasing C) Average total cost is unchanged D) Marginal cost is decreasing

A

The larger the output, the greater the quantity of output over which fixed cost is spread. Called the ______ effect, this leads to a ________. A) Spreading; lower average fixed cost B) Spreading; higher average fixed cost C) Diminishing returns; lower average variable cost D) Diminishing returns: higher average variable cost

A

The sum of fixed and variable costs is: A) Total cost B) Marginal cost C) Variable cost D) Average cost

A

The total cost curve is: A) Positively sloped B) Negatively sloped C) Vertical D) Horizontal

A

Which of the following curves is not affected by the existence of diminishing returns? A) The average fixed cost curve B) The average variable cost curve C) The average total cost curve D) The marginal cost curve

A

A ------ is an organization that produces g or s for sale a) production function b) firm c) variable input d) fixed input

B

A cost that does not depend on the quantity of output produced is called a: A) Marginal cost B) Fixed cost C) Variable cost D) Average cost

B

A farm can produce 1,000 bushels of wheat per year with two workers and 1,300 bushels of wheat per year with three workers. The marginal product of the third worker is: A) 100 bushels B) 300 bushels C) 1,300 bushels D) 2,300 bushels

B

Diminishing returns to an input occur: A) When all inputs are fixed B) When some inputs are fixed and some are variable C) When all inputs are variable D) Only in the long run

B

The marginal product of labour is: A) The change in labour divided by the change in total product B) The slope of the total product of labour curve C) The change in average product divided by the change in the quantity of labour D) The change in output that occurs when capital increases by one unit

B

The total product curve: A) Shows the relation between output and the quantity of variable input for varying levels of the fixed input B) Will become flatter as output increases if there are diminishing returns to the variable input C) Will be downward sloping if there are diminishing returns to the variable input D) Will become horizontal when the marginal product of the variable input is constant

B

A curve that shows the quantities of output that can be obtained from different quantities of a variable input, assuming other inputs are fixed, is called the _______ curve. A) Total input B) Marginal input C) Total product D) Average total quantity

C

A firm finds that its long-run average total costs increase as it produces more output. This firm is experiencing: A) Economies of scale B) Constant returns to scale C) Diseconomies of scale D) A spreading effect

C

If Marie Marionettes is operating under condition of diminishing marginal product, the marginal cost will be: A) Equal to average total cost B) Decreasing C) Increasing D) Constant

C

If marginal cost is equal to average total cost, then: A) Average total cost is increasing B) Average total cost is at its maximum C) Average total cost is at its minimum D) Marginal cost is increasing

C

In Economics, the short run is defined as: A) Less than 1 year B) Less than 6 months C) Period in which some inputs are considered to be fixed in quantity D) Period in which some inputs are fixed, but it cannot exceed 1 year

C

In SR: A) All inputs are fixed B) All inputs are variable C) Some inputs are fixed and some variable D) All costs are variable

C

The ________ is the increase in output that is produced when hiring an additional worker. A) Average product B) Total product C) Marginal product D) Marginal cost

C

The marginal cost curve is the mirror image of the: A) Total product curve B) Average product curve C) Marginal product curve D) Average total cost curve

C

Which of the following is correctly defined? A) MC= TC/ FC B) ATC=VC+FC C) ATC=AVC+AFC D) TC=AVC+AFC

C

Average variable cost equals all of the following except: A) Variable cost divided by output B) (total cost - fixed cost) divided by output C) Average total cost minus average fixed cost D) Variable cost times output

D

In the long run: A) All inputs are fixed B) Inputs are neither variable nor fixed C) At least one input is variable and one input is fixed D) All inputs are variable

D

In the short run, the average total cost curve slopes upward because of: A) Economies of scale B) Diseconomies of scale C) Increasing returns D) Diminishing returns

D

The average total cost of producing cell phones in a factory is $20 at the current output level of 100 units per week. If fixed cost is $1,200 per week: A) Average fixed cost is $20 B) Total cost is $3,200 C) Variable cost is $2,000 D) Average variable cost is $8

D

The fixed cost curve is: A) Positively sloped B) Negatively sloped C) Vertical D) Horizontal

D

When Caroline's dress factory hires two workers, the total product is 50 dresses. When she hires three workers, total product is 60, and when she hires four workers total product is 65. The slope of the marginal product curve when two to four workers are hired is: A) Upward sloping B) Horizontal C) Vertical D) Downward sloping

D

TC =

FC + VC

AFC =

FC / Q

ATC=

TC / Q

AVC =

VC / Q

A variable cost

a cost that depends on the quantity of output produced, cost of the variable input

A fixed cost is

a cost that does not depend on the quantity of the output produced, it is the cost of the fixed input

Marginal cost curves often slope downward as a firm increases its production from 0 up to some low level, sloping upward only at higher levels of production, this initial downward slope occurs because

a firm that employs only a few workers often cannot reap the benefits of specialization of labour. This specialization can lead to increasing returns at first, and so to a downward-sloping marginal cost curve. Once there are enough workers to permit specialization however diminishing returns set in.

There are decreasing returns to scale (diseconomies of scale) when

average total cost increases as output increases

MC =

change in tc / change in q

Marginal cost is upward sloping due to...

diminishing returns

In the SR..

fixed cost is completely outside the control of a firm, but all inputs are variable in the long run, so in the long run fixed cost may also be varied

The marginal product of labour

is the increase in quantity of output when you increase the quantity of that input by one unit

In LR what happens to a firms fixed cost

it becomes a variable it can choose

the two effects on average total cost increasing output has

spreading effect - larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost // diminishing returns effect - larger the output the greater the amount of variable input required to produce additional units leading to higher average variable cost

Total cost curve becomes ... as more output is produced due to ...

steeper, diminishing returns

The marginal cost of producing a good or service is

the additional cost incurred by producing one more unit of that g or s

What are diminishing returns to an input

when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input

Increasing returns to scale (econs of scale) are

when average total cost declines as output increases

Relationship between average total cost and marginal cost curves

when marginal cost equals total cost, we must be at the bottom of the U, because only at the point is average total cost neither falling nor rising