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Exam 7: Costs in the Long Run

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Question 61

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-Refer to the graph above to answer this question. Can this firm produce an output of 200 at an average total cost of $40?

A) Yes, and that output would be economic capacity.
B) Yes, but production would be inefficient.
C) No, this combination is unobtainable given present resource prices and the current state of technology.
D) No, this combination would be unobtainable because production is inefficient.

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Question 62

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State whether each of the following scenarios shows economies of scale or diseconomies of scale. a) Increase firm size leads to greater problems in communication between the firms major stakeholders. b) Increase firm size creates coordination problems among departments. c) Increase firm size leads to greater specialization of management. d) Increase firm size enables greater division of labour.

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a) Diseconomies of s...

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Question 63

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What is meant by the term "economic capacity"?

A firm's economic capacity and its most productive output level are the same.

-Refer to the graph above to answer this question. Could this firm produce an output of 200 at an average total cost of $20?

Table 7.1 contains short-run cost date for four different plants sizes for Jackson's Jazz Instruments. $\begin{array}{l}\text { Table } 7.1\\\begin{array} { c c c c c } \hline \text { Output } & \text { Plant 1 } & \text { Plant 2 } & \text { Plant } 3 & \text { Plant 4 } \\\hline 100 & 90 & 95 & 100 & 130 \\200 & 70 & 80 & 90 & 115 \\300 & 90 & 65 & 70 & 90 \\400 & 110 & 80 & 60 & 70 \\500 & 130 & 95 & 70 & 55 \\600 & 150 & 125 & 80 & 65 \\\hline\end{array}\end{array}$ a) What is the best size of plant for each of the following level of output? i. 200 ii. 300 iii. 400 iv. 500 b) Is Jackson's Jazz Instruments experiencing economies, diseconomies, or constant return to scale?

Economies of scale are divided into those cost advantages that are technical and those that are pecuniary.

The long run is the circumstance in which at least one input is variable.

Suppose that a firm's output increases from 500 to 600 units and its total cost increases from $50,000 to $72,000, and if the price of inputs and technology remain unchanged, calculate the change in average total cost and state whether constant returns to scale, economies of scale or diseconomies of scale exist in this case.

Refer to the graph above to answer this question. All of the following statements, except one, are correct. Which is the exception?

If we know that a firm is experiencing diseconomies of scale, which of the following statements is true?

The long-run average cost curve declines continuously as output levels increase.

What is meant by the term economic capacity?

The ability of a person to supervise 12 workers just as well as 8 is an example of:

What does MES refer to?

Suppose that a firm's output increases from 500 to 1,000 units and its total cost increases from $50,000 to $100,000, and if the price of inputs and technology remain unchanged, calculate the change in average total cost and state whether constant returns to scale, economies of scale or diseconomies of scale exist in this case.

Below is short-run cost data for four different plant sizes. Plant 2 has exactly twice as many inputs as does Plant 1. Plant 3 has exactly three times as many inputs as does Plant 1 and Plant 4 has exactly four times as many inputs as does Plant 1. $\begin{array} { c c c c c } \text { Output } & \text { \$ AC: Plant 1 } & \text { \$ AC: Plant 2 } & \text { \$ AC: Plant 3 } & \text { \$ AC: Plant 4 } \\5 & 12 & 14 & 15 & 15.25 \\10 & 11 & 13 & 13.75 & 14.25 \\15 & 12 & 12 & 12.75 & 14 \\20 & 14 & 11 & 12 & 13 \\25 & 17 & 12 & 11.50 & 12.20 \\30 & 21 & 13 & 11 & 11.70 \\35 & 26 & 14 & 11.50 & 11.30 \\40 & 32 & 17 & 12 & 11 \\45 & 39 & 21 & 12.75 & 11.30 \\50 & 47 & 25 & 13.75 & 11.70\end{array}$ -Which of the following statements is correct if a firm's capacity output increases from 300 to 600 and its total costs rise from $40,000 to $78,000?

What is the likely cause of a firm operating below MES?

Below are some cost data pertaining to Plant 1, which has total fixed costs of $1,000. Suppose that Plant 2 is exactly twice the size of Plant 1 while using (at economic capacity) twice the amount of labour and materials, and that it produces exactly twice the output. Further, assume that the prices of these inputs do not change. $\begin{array} { l c } \text { Output } & \text { \$AC: Plant 1 } \\10 & 200 \\20 & 175 \\30 & 150 \\40 & 175 \\50 & 200 \\60 & 250 \\70 & 350\end{array}$ -Refer to the information above to answer this question. What is the output produced if the total cost in Plant 2 is $14,000?

What is true if decreasing returns to scale are present?