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84 True/False questions

  1. Long run average cost is similar to average total cost because...The cost per input of producing each quantity of output in the long run, when all inputs are variable.

    LRATC= LRTC/Q

          

  2. The MC curve crosses both the AVC curve and the ATC curve at their respective minimum points.Yep.

          

  3. The average variable cost curve and the average total cost curve are each U-shaped...reflecting the relationship between average and marginal cost. THe marginal cost curve must cross each of the average curves at their minimums.

          

  4. What does the law of diminishing marginal returns state?The marginal product of labor decreases as more labor is hired. Output still rises when another worker is added, so marginal product is positive. But the rise in output is smaller and smaller with each successive worker.

          

  5. AVC is the sum of AVC and AFC.Yep

          

  6. AFC problemSee page 196

          

  7. The U-shape of the AVC curve results from the U-shape of the mC curve, which in turn is based on...increasing and then diminishing marginal returns to labor.

          

  8. The firm's average fixed cost (AFC) is its total fixed cost divided by the quantity (Q) of output:Good point. Wow.

          

  9. Eventually, the rise in AVC wins out, and ATC begins to rise as well.This explains any the ATC curve is U-shaped.

          

  10. The greatest opportunities for increases specialization occur when a firm is starting at a relatively low level of output, with a relatively small plant and small workforce.Rise in the marginal product of labor.

          

  11. In the long run, the firm can change the size of its plants.All inputs and all costs are variable.

          

  12. When long-run total cost rises proportionately less than output, producing is characterized by economies of scale, and the LRATC curve slopes _______.constant returns to scale

          

  13. See page 195See page 196

          

  14. While economies of scale are more likely at low levels of output, diseconomies of scale are more likely at higher output levels.Wow. Insightful.

          

  15. What is the collection of fixed inputs at a firm's disposal?Plant

          

  16. A firm's cost is its opportunity cost, which includes __________.compete with each other

          

  17. What is profit?The costs of all inputs-- fixed and variable-- used to produce a given output level in the short run.

          

  18. What is a time horizon during which at least one of the firm's inputs cannot be varied?Short run

          

  19. What is total cost?The costs of all inputs-- fixed and variable-- used to produce a given output level in the short run.

          

  20. Whenever the MC curve is above the average curve, the average curve slopes upward.Therefore, when MC goes from below the average to above the average-- that is, where the MC curve crosses the average curve-- the average must be at its very minimum (where it changes from a downward slope to an upward slope)

          

  21. What is technology?The costs of all inputs-- fixed and variable-- used to produce a given output level in the short run.

          

  22. What is an input whose usage can change over some time period?Variable input

          

  23. What are the costs of all inputs that are fixed in the short run?Total fixed cost

          

  24. What are constant returns to scale?The more output produced, the lower the cost per unit. The long-run average total cost decreases as output increases.

          

  25. What is the marginal product of labor (MPL)?THe cost of producing each quantity of output when all inputs are variable and the least-cost input mix is chosen.

          

  26. When the marginal product of labor rises as more workers are hired, there are _______________.Increasing marginal returns to labor

          

  27. What does the MPL tell us?Tells us the rise in output produced when one more worker is hired. For example, when employment rises from 2 to 3 workers, total product rises from 90 to 130, so the marginal product of labor for that change in employment is calculated as (130-90)/1= 40 units of output.

          

  28. When the marginal product of labor (MPL) rises, marginal cost (MC) falls. When MPL falls, MC rises.Increasing marginal returns to labor

          

  29. What is the average variable cost?The change in total cost from producing one more unit of output.

          

  30. See table on page 208Average and marginal test scores.

          

  31. A firm's LRATC curve combines portions of each ATC curve available to the firm in the long run. FOr each output level, the firm will always choose to operate on the ATC curve with the lowest possible cost.Good point. Wow.

          

  32. AFC always _____ as output rises.falls

          

  33. See example on page 198Average and marginal test scores.

          

  34. The long-run costs of producing a given level of output can be less than or equal to, but not greater than,the short-run total cost (LRTC is less than or equal to TC). We can also state this relationship in terms of average costs, that is, we can divide both sides of the inequality by Q and obtain LRTC/Q is less than or equal to TC/Q. Using the definitions, this translates to LRATC is less than or equal to ATC.

          

  35. The amount that output increases with each one-unit rise in employment.In the short run, it is stuck with its current plant.

          

  36. What is the long-run average total cost (LRATC)?The cost per input of producing each quantity of output in the long run, when all inputs are variable.

    LRATC= LRTC/Q

          

  37. As long as MPL is falling...Tells us the rise in output produced when one more worker is hired. For example, when employment rises from 2 to 3 workers, total product rises from 90 to 130, so the marginal product of labor for that change in employment is calculated as (130-90)/1= 40 units of output.

          

  38. The marginal curve has...A U-shape reflecting the underlying marginal product of labor.

          

  39. In the short run, a firm can only move along its current ATC curve. In the long run; however....It can move from one ATC curve to another by varying the size of its plant. As it does so, it will also be moving along its LRATC curve.

          

  40. What are lumpy inputs?Inputs that cannot be increased in tiny increments, but rather must be increased in large jumps.

          

  41. When LRATC rises with an increase in output, we have diseconomies of scale. Mathematically... (page 207)Yep.

          

  42. What is the long run total cost (LRTC)?Total cost divided by the quantity of output produced. The total cost per unit of output:

    ATC= TC/Q

    See page 197 for example

          

  43. What is the average total cost (ATC)?Total cost divided by the quantity of output produced. The total cost per unit of output:

    ATC= TC/Q

    See page 197 for example

          

  44. For many purposes, we are interested in how cost changes when output changes. This information is provided by another concept:The marginal cost (MC)

          

  45. No matter what kind of production or what kind of firm, _________ will always fall as output rises. Why?Average fixed costs (AFC), Because TFC remains constant, so a rise in Q myst cause the ratio TFC/Q to fall.

          

  46. What is an input whose quantity must remain constant over some time period?Variable input

          

  47. So when both AVC and AFC are falling, _____ decreases-- even more rapidly than AVC does.ATC

          

  48. The costs of obtaining the firm's variable inputs are what? Costs of variable inputs, which change with output.Variable costs

          

  49. THe long-run average cost of producing a given level of output can be less than or equal to, but not greater than...the short-run average total cost (LRATC is less than or equal to ATC)

          

  50. What is diminishing marginal returns to labor?THat as we continue to add more of any one input ( holding the other inputs constant), its marginal product will eventually decline. It is a physical law, not an economic one. It is based on the nature of production.

          

  51. What shapes are the AVC and AFC curves?U-shape

          

  52. What is the marginal product of labor increase as the more labor is hired?It is u-shaped

          

  53. When AVC starts to rise, the rising AVC and falling AFC ____________.compete with each other

          

  54. What is the equation for total cost?The cost of all variable inputs used in producing a particular level of output.

          

  55. What is an example of total cost?The sum of all fixed and variable costs. TC= TFC +TVC

          

  56. What is the total variable cost?Total variable cost divided by the quantity of output produced. AVC is the cost of the variable inputs per unit of output:

    AVC= TVC/Q

    see page 196 for example

          

  57. In the long run, there are no fixed costs...THe cost of producing each quantity of output when all inputs are variable and the least-cost input mix is chosen.

          

  58. What is the maximum quantity of output that can be produced from a given combination of inputs?Total product

          

  59. The Long run average total cost curve is formed by combining portions of different ATC curvesthe short-run average total cost (LRATC is less than or equal to ATC)

          

  60. When both output and long-run total cost rise by the same proportion, production is characterized by __________, and the LRATC curve is flat.constant returns to scale

          

  61. Constant returns to scale, if present at all, are most likely to occur at some _____ range of output.Intermediate

          

  62. What is the total fixed costs divided by the quantity of output produced?Average fixed cost

          

  63. When we look at the behavior of LRATC, we often expect a pattern like the following:Economies of scale (decreasing LRATC) at relatively low levels of output, constant returns to scale (constant LRATC) at some intermediate levels of output, and diseconomies of scale (increasing LRATC) at relatively high levels of output. This is why LRATC curves are typically U-shaped.

          

  64. Firms that grow to their minimum efficient scale will often have a cost advantage over other firms that operate at smaller output levels.The lowest output level at which the firm's LRATC curve hits bottom.

          

  65. What are diseconomies of scale?Long-run average total cost increases as output increases.

          

  66. What are fixed costs? Also known as overhead costs or overheadcosts of fixed inputs, which remain constant as output changes

          

  67. What is the minimum efficient scale?The more output produced, the lower the cost per unit. The long-run average total cost decreases as output increases.

          

  68. In the MC curve, it first declines, then rises. Why is this?At low levels of employment and output, there are increasing marginal returns to labor: MPL= changeQ/ ChangeL is rising. That is, each worker hired adds more to production than the worker before. But this means that fewer additional workers are needed to proceed an additional unit of output, so the cost of an additional unit of output (MC) must be falling.

          

  69. What is the shape of the LRATC curve?TC= TFC + TVC
    At 90 units of output, the TFC = $150 and TVC = $240, so TC = $150+ $240= $390

          

  70. What is marginal cost?The costs of all inputs-- fixed and variable-- used to produce a given output level in the short run.

          

  71. THe U-shape of the ATC curve results from the behavior of both AVC and AFC. At low levels of output, AVC and AFC are both falling, so that ATC curve slopes downward.increasing and then diminishing marginal returns to labor.

          

  72. What is the least-cost rule?It states that a business firm will produce any given output level using the least-cost combination of inputs available to it.

          

  73. What is a time horizon long enough for a firm to vary all of its inputs?The long run

          

  74. Whenever the MC curve is below one of the average curves,the average curve slopes downward.

          

  75. What is economies of scale?The more output produced, the lower the cost per unit. The long-run average total cost decreases as output increases.

          

  76. What is a sunk cost?One that already has been paid, or must ne paid, regardless of any future action being considered. Sunk costs should not be considered when making decisions. They are not included in the opportunity costs; they are already spent.

          

  77. Why should total costs ever increase by a smaller proportion than output? Why should a firm experience economies of scale?Gains from specialization and spreading costs of lumpy inputs

          

  78. Minimum ATC occurs at a higher output than does minimum AVC.Yep.

          

  79. Make sure to look through chapter 7's graphs.summarizes the chapter:)

          

  80. What are organizations that are owned and operated by private individuals that specialize in production?Business firms

          

  81. The LRATC curve slopes upward when there are diseconomies of scale, and it is flat when there are constant returns to scale.When long-run total cost rises more than in proportion to output, there are diseconomies of scale, and the LRATC curve slopes downward.

          

  82. Why does diminishing marginal returns to labor happen?As we keep adding workers, additional gains from specialization will be harder to achieve. I f we keep increasing the quantity of any input, while holding the others fixed, diminishing marginal returns will eventually set in.

          

  83. When an increase in output causes the LRATC to decrease, we say that the firm is enjoying ________.both are obtained by dividing total cost by the level of output.

          

  84. What is the marginal cost (MC)?The change in total cost divided by the change in output.

    MC= ATC/AQ (the A represents delta)

    see example on page 197

    This entry is listed between the output levels ) and 30 in the table, and graphed between output levels in the figure.