Beruflich Dokumente
Kultur Dokumente
11 | Technology, Production,
and Costs
272
relationship among marginal cost, average total cost, average variable cost, and average fixed cost. It is
one of the most important graphs in microeconomics.
11.6 Costs in the Long Run (pages 366370)
Understand how firms use the long-run average cost curve in their planning. The long-run average
cost curve shows the lowest cost at which a firm is able to produce a given level of output in the long run.
For many firms, the long-run average cost curve falls as output expands because of economies of scale.
Minimum efficient scale is the level of output at which all economies of scale have been exhausted.
After economies of scale have been exhausted, firms experience constant returns to scale, where their
long-run average cost curve is flat. At high levels of output, the long-run average cost curve turns up as
the firm experiences diseconomies of scale.
Appendix: Using Isoquants and Isocost Lines to Understand Production and Cost (pages 379387)
Use isoquants and isocost lines to understand production and cost.
Chapter Review
Chapter Opener: Fracking, Marginal Costs, and Energy Prices (page 351)
Technological change helps firms create new products and lower the costs of making existing products.
For example, hydraulic fracturing (fracking) in the oil industry has lowered the cost of drilling, making
it profitable for companies to extract oil from shale rock formations. As a result, in 2012, the United
States experienced the largest increase in oil production in its history. A similar increase happened in
2013 and is expected for many years to come.
In this chapter, you will analyze the cost concepts of production and see how they affect the operations of
firms.
11.1
Technology is the processes a firm uses to turn inputs into outputs of goods and services. Technological
change is a change in the ability of a firm to produce a given level of output with a given quantity of
inputs. Positive technological change results from changes such as rearranging the layout of a store or
purchasing faster or more reliable machinery. Positive technological change causes more output to be
produced from the same inputs or the same output from fewer inputs. Negative technological change may
result from changes such as hiring less-skilled workers or damage to buildings from inclement weather.
The result is a decline in the quantity of output that can be produced from a given quantity of inputs.
Study Hint
Do not confuse technological change with invention. An invention is the development of a new product or
process for making a product. An invention or discovery of new information, such as a chemical formula, is
not technological change. Technological change results from the application of new or old knowledge to a
production process. Making the Connection Improving Inventory Control at Wal-Mart provides an
example of technological change in which Wal-Mart uses electronic point-of-sale information and just-in-time
(JIT) delivery to manage its inventories and supply chain to fulfill the needs of the customer and grow the
business. A number of other firms have followed in Wal-Marts footsteps by incorporating JIT and electronic
inventory controls into their production process to increase their efficiency.
Supports Learning Objective 11.1: Define technology and give examples of technological change.
Decades can pass before a new idea is developed to the point where it can be widely used. For example,
the Wright brothers first achieved self-propelled flight at Kitty Hawk, North Carolina, in 1903. But their
plane was very crude, and it wasnt until the introduction of the DC-3 by Douglas Aircraft in 1936 that
regularly scheduled intercity flights became common in the United States. Similarly, the development of
the first digital electronic computerthe ENIACoccurred in 1945, but the first IBM personal computer
was not introduced until 1981. It wasnt until the 1990s that widespread use of computers began to have a
significant effect on the productivity of American business.
In 1999, Hershey Foods, manufacturer of Hersheys bars and Reeses Peanut Butter Cups, installed a new
software program designed by the German company SAP to coordinate almost all of the companys
operations. Unfortunately, it took Hershey many months to get the software to work properly. During the
period when the software was not working well, Hershey failed to send out some shipments, and other
shipments contained less candy than they were supposed to have. Software problems made it difficult for
Hershey to keep track of what had been shipped and to whom it had been shipped. The company lost
$150 million worth of sales before the problem was corrected and the software began to work as intended.
Sources: For DC-3 and ENIAC, David Mowery and Nathan Rosenberg, Twentieth Century Technological Change, in Stanley
L. Engerman and Robert Gallman, eds., The Cambridge Economic History of the United States, Vol. III: The Twentieth Century,
Cambridge: Cambridge University Press, 2000. For Hershey: Emily Nelson and Evan Ramstad, Trick or Treat: Hersheys
Biggest Dud Has Turned Out to Be Its New Technology, Wall Street Journal, October 29, 1999 and Hershey Foods Warns
1999 Earnings Will Be Worse Than Initially Feared, Dow Jones Business News, December 28, 1999.
274
Step 1:
Step 2:
Step 3:
Was the Wright Brothers 1903 flight at Kitty Hawk an example of technological
change? Was the development of the ENIAC computer an example of technological
change?
Neither the Wright Brothers 1903 flight at Kitty Hawk nor the development of ENIAC
represents technological change because there was no impact on the ability of firms to
produce output with a different quantity of inputs.
Step 4:
Explain why the widespread use of computers in the 1990s resulted in positive
technological change.
The widespread use of computers led to an improvement in productivity. Many firms were
able to produce the same output of goods and services with fewer inputs or more output with
the same quantity of inputs.
Step 5:
11.2
The Short Run and the Long Run in Economics (pages 353357)
Learning Objective: Distinguish between the economic short run and the economic long
run.
The short run is a period of time during which at least one of the firms inputs is fixed. The long run is a
period of time long enough to allow a firm to vary all of its inputs, to adopt new technology, and to
increase or decrease the size of its physical plant. Total cost is the cost of all the inputs a firm uses in
production. Variable costs are costs that change as output changes. Fixed costs are costs that remain
constant as output changes.
Total Cost (TC ) = Fixed Cost (FC ) + Variable Cost (VC )
In the long run, all costs are variable because the quantities of all inputs are variable.
Total costs can also be divided into explicit and implicit costs. An explicit cost is a cost that involves
spending money. An implicit cost is a nonmonetary opportunity cost. Recall from Chapters 1 and 2 that
the opportunity cost of an activity is the highest-valued alternative that must be given up to engage in the
activity. Opportunity costs can include both explicit and implicit costs.
The production function is the relationship between the inputs employed by the firm and the maximum
output it can produce with those inputs. In the short run, at least one input is fixed, so the short-run
production function shows the level of output the firm can produce with different levels of the variable
inputs and a constant quantity of the fixed input. The long-run production function shows the maximum
quantity of output the firm can produce using various levels of all inputs. Knowing how many inputs are
2015 Pearson Education, Inc.
Study Hint
An example may help you to understand the difference between a short-run and a long-run production
function. Your hometown probably has a theater, stadium, or auditorium. Various events are held at these
venues during the year, some of which may sell out while others do not. In the short run, the size of the
facility is a fixed input and variations in crowd size can be accommodated by changes in the use of
variable inputs (such as ticket takers, ushers, parking attendants, and food at refreshment stands). It is
unlikely that the owners will decide to increase or decrease the capacity of the facility unless they expect
a permanent change in average expected attendance. Such a permanent change could be the result of an
increase or decrease in the population served by the facility or the acquisition or loss of a permanent
tenant, for example, a professional sports franchise or a philharmonic orchestra. Expanding or contracting
the size of the facility (usually by tearing down the existing structure and building a new one) is an
example of a long-run production decision. See Making the Connection Fixed Costs in the Publishing
Industry for a discussion of fixed costs in the editing and marketing of books. Because the number of
editors, designers, and marketing people does not vary with the number of copies of books that are sold in
a given year, publishers treat the salaries and benefits of people in these job categories as fixed costs.
Supports Learning Objective 11.2: Distinguish between the economic short run and the economic
long run.
Suppose that you own an apple orchard and the following chart represents the number of apples that can
be picked from your orchard on a per-hour basis with a given quantity of capital equipment, such as
baskets and ladders.
Quantity of
Workers
0
Apples
0
Fixed Cost
$10
Variable
Cost
$0
100
10
210
10
10
290
10
15
340
10
20
360
10
25
Total Cost
a. Complete the table above by calculating the total cost and the average total cost.
b. Does the total cost in the table represent your short-run or long-run total cost?
276
Step 2:
Answer question (a) by computing the total cost and the average total cost.
Total cost is calculated by adding the fixed cost to the variable cost. The average total cost is
the total cost divided by the quantity. The table below provides the results of the calculations.
Step 3:
5
15
$ 0.15
Quantity of
Workers
0
Apples
0
Fixed
Cost
$10
100
10
210
10
10
20
0.10
290
10
15
25
0.09
340
10
20
30
0.09
360
10
25
35
0.10
Answer question (b) by determining whether the costs and production function
shown in the table are representative of the short run or the long run.
To determine whether this is the short run or the long run, we need to determine if all inputs
are variable or if at least one input is fixed. In the description of the problem, we see that the
number of ladders and baskets is fixed, so we are looking at the short-run condition. This is
reinforced by the fact that your orchard is experiencing a positive and constant fixed cost.
11.3
The marginal product of labor is the additional output a firm produces as a result of hiring one more
worker. The increases in marginal product of labor that occur at low rates of output result from
specialization and the division of labor. Consider for instance, a firm that initially employs only one
worker. Adding a second or third worker, for example, would typically reduce the time the workers spend
moving from one activity to the next and allow them to become more specialized at their tasks. At some
point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital,
will cause the marginal product of the variable input to decline. This principle is called the law of
diminishing returns. When the marginal product of labor is decreasing, but still positive, total output
increases, but at a decreasing rate.
The average product of labor is the total output produced by a firm divided by the quantity of workers.
When the marginal product of labor is greater than the average product of labor, the average product of
labor must be increasing. When the marginal product of labor is less than the average product of labor, the
average product of labor must be decreasing. The marginal product of labor equals the average product of
labor for the quantity of workers where the average product of labor is at a maximum.
Study Hint
The relationship between the marginal product of labor and average product of labor is similar to many other
marginal-average relationships. You will better understand the relationship between the two after reviewing
the example of GPAs illustrated in Figure 11.3. Also read Making the Connection Adam Smiths Famous
Account of the Division of Labor in a Pin Factory for a discussion of how the division of labor can increase
the average output per worker. Smith describes how workers become very specialized in a particular part of the
production process with the division of labor and, thus, become more productive.
Supports Learning Objective 11.3: Understand the relationship between the marginal product of
labor and the average product of labor.
Suppose that you own an apple orchard and the following chart represents the number of apples that can
be picked from your orchard on a per-hour basis with the given capital equipment, including five baskets.
Quantity of
Workers
0
1
2
3
4
5
Quantity of
Baskets
5
5
5
5
5
5
Apples
0
100
210
290
340
360
Marginal
Product of
Labor
Average
Product of
Labor
a. Complete the table above by calculating the marginal product of labor and the average product of
labor.
b. Describe the relationship between marginal product of labor and the orchards total production.
Does the law of diminishing returns apply to the orchards production?
c. Describe the relationship between the marginal product of labor and the average product of labor.
Step 2:
Answer question (a) by computing the marginal product of labor and the average
product of labor.
The marginal product of labor is the additional output a firm produces as a result of hiring
one more worker. This is calculated by dividing the change in the quantity of apples produced
by the change in the quantity of labor used to produce the apples. The average product of
labor is the total output produced by a firm divided by the quantity of workers used to
produce that output. The results of these calculations are displayed in the table on the
following page.
2015 Pearson Education, Inc.
278
Quantity of
Workers
0
1
2
3
4
5
Step 3:
Quantity of
Baskets
5
5
5
5
5
5
Apples
0
100
210
290
340
360
Marginal
Product of
Labor
Average
Product of
Labor
100
110
80
50
20
100
105
97
85
72
Answer question (b) by explaining the relationship between the marginal product
and the total output.
When the marginal product is increasing rapidly, the firms total output increases rapidly. As
the gains from specialization and the division of labor are exhausted, an additional increase in
labor causes the marginal product to fall. Total output continues to increase but at a
decreasing rate as the marginal product falls. See Figure 11.2 on page 358 in the textbook to
see an example of this.
Step 4:
Answer question (c) by describing the relationship between the marginal product
of labor and the average product of labor.
When the marginal product of labor is greater than the average product of labor, the average
product of labor will increase. When the marginal product of labor is lower than the average
product of labor, the average product of labor will decrease. The marginal product of the
second worker is 110, which is higher than the average product of 100 apples per worker,
causing the average product of two workers to rise from 100 to 105. When the third worker is
hired, only 80 additional apples are picked, which is less than the average of 105. The
addition of the third worker, whose marginal product was less productive than average, pulls
down the average product from 105 to 97. (See the GPA example on page 360 in the textbook
for an example of how the marginal value drives the average value.)
11.4
Learning Objective: Explain and illustrate the relationship between marginal cost and
average total cost.
In the short run, the behavior of the marginal product of the variable factor is represented in the behavior
of marginal cost. Marginal cost is the change in a firms total cost from producing one more unit of a
good or service. The U shape of the average total cost curve is determined by the shape of the marginal
cost curve. Marginal cost (MC) can be expressed mathematically as
MC =
TC
Q
Study Hint
Solved Problem 11.4 shows how, as diminishing returns set in, the average and marginal costs of production
rise. Work related end-of-chapter problem 4.7 for further help in understanding the law of diminishing returns
and its relationship to costs.
11.5
Learning Objective: Graph average total cost, average variable cost, average fixed
cost, and marginal cost.
ATC =
TC
Q
Average fixed cost (AFC) equals total fixed cost divided by the quantity of output produced.
AFC =
FC
Q
Average variable cost (AVC) equals total variable cost divided by the quantity of output produced.
AVC =
VC
Q
Average total cost (ATC) can then be calculated as the sum of average fixed cost and average variable
cost.
The MC, ATC, and AVC curves are all U-shaped. Here are key points about these curves:
The MC curve intersects the AVC and ATC curves at their minimum points.
When MC is below AVC or ATC, it causes them to decrease, and when MC is above AVC or ATC,
it causes them to increase.
As output increases, the difference between ATC and AVC (this is equal to AFC) gets smaller
because AFC gets smaller and smaller as output increases.
280
Study Hint
To draw the curves accurately, start with the AVC curve as a U-shape, then draw the ATC curve as a U-shape
above the AVC and make sure the vertical distance between them decreases as output increases. Finally draw
the MC curve and make sure of the following:
MC intersects both AVC and ATC at their minimum points.
When AVC and ATC curves are decreasing, MC is below both of them.
When AVC and ATC curves are increasing, MC is above both of them.
MC reaches its minimum point before AVC and ATC do.
Supports Learning Objective 11.5: Graph average total cost, average variable cost, average
fixed cost, and marginal cost.
Suppose that you own an apple orchard and the following chart represents the quantity of apples that can be
picked from your orchard per hour with a given quantity of capital equipment, such as baskets and ladders.
Quantity of
Workers
0
Apples
0
Fixed
Cost
10
Variable
Cost
0
Total
Cost
10
100
10
15
210
10
10
20
290
10
15
25
340
10
20
30
360
10
25
35
Cost per
Apple (ATC)
MC
AVC
AFC
a. Complete the table above by calculating the average total cost, marginal cost, average variable
cost, and the average fixed cost.
b. Graph the marginal cost, average total cost, average variable cost, and average fixed cost curves.
Step 2:
Answer question (a) by computing the average total cost, the marginal cost, the
average variable cost, and the average fixed cost.
The average total cost is the total cost divided by the quantity of output. The average fixed
cost is the total fixed cost divided by the quantity of output produced. Average variable cost
is calculated by dividing the total variable cost by the quantity of units produced. The
marginal cost is the change in a firms total cost from producing one more unit of a good or
service. MC is calculated by dividing the change in TC by the change in Q, which is apples.
The results of these calculations are presented below. (Hint: Dont make the mistake of using
the quantity of workers in these calculations; use the quantity of apples produced.)
Quantity of
Workers
0
Apples
0
Fixed
Cost
10
Variable
Cost
0
Total
Cost
10
Cost per
Apple (ATC)
MC
AVC
AFC
100
10
15
$0.15
$0.05
$0.050
$0.100
210
10
10
20
0.10
0.05
0.047
0.048
290
10
15
25
0.09
0.06
0.052
0.034
340
10
20
30
0.09
0.10
0.059
0.029
360
10
25
35
0.10
0.25
0.069
0.028
Step 3:
11.6
Learning Objective: Understand how firms use the long-run average cost curve in their
planning.
There are no fixed costs in the long run, so total cost equals variable cost. In the short run, managers of
firms decide how they will operate their current store, office, or factory. In the long run, managers decide
whether the firm would be more profitable if the store, office, or factory were made larger or smaller.
A long-run average cost curve shows the lowest cost at which the firm is able to produce a given
quantity of output in the long run, when no inputs are fixed. Economies of scale is the situation when a
firms long-run average total costs fall as it increases output. Constant returns to scale is the situation
when a firms long-run average costs remain unchanged as it increases output. Minimum efficient scale
282
is the level of output at which all economies of scale have been exhausted. Diseconomies of scale is the
situation when a firms long-run average costs rise as it increases output.
Economies of scale may result from several factors. The firms technology may make it possible to
increase production with a smaller than proportional increase in at least one input. As output expands,
both workers and managers may become more specialized, enabling them to be more productive. Large
firms may be able to purchase inputs at lower costs than smaller competitors. Diseconomies of scale
result when managers have difficulty coordinating a firm as it grows in scale.
Study Hint
Long-run average cost curves, such as those shown in Solved Problem 11.6, are drawn as smooth U-shaped
curves. Do not confuse these curves with short-run average total cost curves. Read Dont Let This Happen to
You! Dont Confuse Diminishing Returns with Diseconomies of Scale, which explains why there are
different explanations for the U shape of the short-run and long-run curves. The smooth long-run average cost
curve is similar to the optical illusion of a motion picture. A motion picture is essentially a series of still
photographs that when projected sequentially (and rapidly) give the viewer the illusion of live, continuous
motion. Similarly, the long-run average cost curve is made up of a series of short-run ATC curves, each of
which contributes a small portion (one point) of the long-run average cost curve. As the plant size increases or
decreases, the effect of the plant size on the production cost (that is, economies and diseconomies of scale)
determines the shape of the long-run average cost curve. The shape of the short-run average cost curve,
however, is determined by diminishing returns.
Appendix
Using Isoquants and Isocost Lines to Understand Production
and Cost (pages 379387)
Learning Objective: Use isoquants and isocost lines to understand production and cost.
The chapter covers the relationship between a firms level of production and its costs. This appendix
looks more closely at how firms choose the combination of inputs to produce a given level of output.
Isoquants
Firms search for the cost-minimizing combination of inputs that will allow them to produce a given level
of output. The cost-minimizing combination of inputs depends on technology and input prices. An
isoquant is a curve showing all the combinations of two inputs, such as capital and labor, that will
produce the same level of output. The farther an isoquant is from the originthe farther to the right on
the graphthe more output the firm is producing. There are many isoquants, one for every possible level
of output.
The marginal rate of technical substitution (MRTS) is the rate at which a firm is able to substitute one
input for another while keeping the level of output constant. The slope of an isoquant becomes less steep
as one moves downward along the isoquant. This is a consequence of diminishing returns.
Study Hint
Figure 11A.1 illustrates three isoquants, each of which represents various combinations of capital
(measured on the vertical axis) and labor (measured on the horizontal axis) that enable Jill to produce a
given number of pizzas per week. Isoquants are similar to indifference curves in several respects. If you
understand the analysis of indifference curves in the appendix to Chapter 10, then you should understand
isoquants.
Isocost Lines
The relationship between the quantity of inputs used and the firms total cost can be shown with an
isocost line. An isocost line shows all the combinations of two inputs, such as capital and labor, that have
the same total cost. An isocost line intersects the vertical axis at the maximum amount of an input (for
example, capital) that can be purchased with a given budget, or total cost. The same isocost line intersects
the horizontal axis at the maximum amount of another input (for example, labor) that can be purchased
with the same budget. One input is substituted for another as one moves along an isocost line, but the total
expenditure on inputs is the same. The slope of an isocost line is constant and equals the change in the
quantity of one input (capital) divided by the change in the quantity of the other input (labor). The slope
of an isocost line is equal to the ratio of the price of the input on the horizontal axis divided by the price
of the input on the vertical axis, multiplied by 1. A change in the price of an input causes the slope to
change, which is a rotation of the isocost line. Higher levels of total cost shift the isocost line outward,
and lower levels of cost shift the isocost line inward.
Study Hint
Figure 11A.2 on page 380 in the textbook illustrates an example of an isocost line. The analysis of isocost
lines is similar to the analysis of budget lines in the appendix to Chapter 10.
284
The slope of the isocost line equals the wage rate (w) divided by the rental price of capital (r). At the point
of cost minimization, the slope of the isoquant equals the slope of the isocost line. Therefore:
MPL w
= ,
MPK r
or after rearranging,
MPL MPK
=
.
w
r
The last equation implies that to minimize cost, a firm should hire inputs up to the point where the last
dollar spent on each input results in the same increase in output.
Study Hint
Solved Problem 11A.1 explains how Jill can find the cost-minimizing combination of inputs to produce pizza.
A firm should purchase or hire inputs up to the point where the ratio of the marginal product to the price of the
input is the same for every input used. If one input has a higher marginal product for the last dollar spent, then
the firm should hire more of that input and less of the other input to minimize the costs of production.
Key Terms
Average fixed cost Fixed cost divided by the
quantity of output produced.
Average product of labor The total output
produced by a firm divided by the quantity of
workers.
Average total cost Total cost divided by the
quantity of output produced.
Average variable cost Variable cost divided by
the quantity of output produced.
Key TermsAppendix
Expansion path A curve that shows a firms
cost-minimizing combination of inputs for every
level of output.
286
Self-Test
(Answers are provided at the end of the Self-Test.)
Multiple-Choice Questions
1. Fill in the blanks. A positive technological change causes_______ , while a negative technological
change causes _______.
a. more output to be produced from the same inputs; less output to be produced from same inputs
b. less output to be produced from the same inputs; more output to be produced from same inputs
c. the same level of output to be produced from the same inputs more output to be produced from
same inputs
d. None of the above occurs.
2. Fill in the blanks. The short run is a period of time _______, while the long run is s period of time
_______.
a. where at least one input is fixed; where all inputs are fixed
b. where at least one input is fixed; where all inputs are variable
c. where all inputs are variable; where at least one input is fixed
d. None of the above is true.
3. The production function shows
a. the relationship between the inputs used by the firm and the maximum output it can produce.
b. the relationship between the variable inputs and the cost of production.
c. the relationship between the fined inputs and the cost of production.
d. none of the above.
4. Total fixed cost
a. increases as output increases.
b. decreases as output increases.
c. stays the same regardless of the level of output.
d. None of the above is true.
5. If the number of people in a publishing company does not go up or down with the quantity of books it
publishes, then how should we categorize the salaries and benefits paid to these employees?
a. They are part of fixed cost.
b. They are part of variable cost.
c. They are an implicit cost.
d. They are not considered a part of the cost of production.
6. Which of the following is known as the highest-valued alternative that must be given up in order to
engage in an activity?
a. opportunity cost
b. explicit cost
c. total cost
d. variable cost
7. Refer to the table below. Which of the following costs are implicit costs?
Paper
$20,000
Wages
Lease payment for copy machines
48,000
10,000
Electricity
6,000
24,000
30,000
Forgone interest
Total
a.
b.
c.
d.
3,000
$141,000
288
11. Refer to the graphs below. Which graph is representative of a typical average total cost curve?
a.
b.
c.
d.
A
B
C
D
14. Refer to the table below. When do diminishing returns in the production of pizzas start?
a.
b.
c.
d.
15. Refer to the graph below. In moving along the curve from point A to point B, which of the following
is more likely to occur?
a.
b.
c.
d.
specialization
diminishing returns
division of labor
none of the above
290
16. Refer to the graph below. From the origin up until point A,
a.
b.
c.
d.
17. Fill in the blanks. Economies of scale are represented by_______, while diseconomies of scale are
represented by _______.
a. the upward sloping part of the long run average cost curve; the downward sloping part of the long
run average cost curve
b. the downward sloping part of the long run average cost curve; the upward sloping part of the long
run average cost curve
c. the upward sloping part of the long run average cost curve; the upward sloping part of the long
run average cost curve
d. the downward sloping part of the long run average cost curve; the downward sloping part of the
long run average cost curve
18. Fill in the blanks. The vertical distance between the total cost and the total variable cost curves is
_______ and reflects _______.
a. variable; total fixed cost
b. constant; marginal cost
c. constant; total fixed cost
d. None of the above is true.
19. Refer to the graph below. Based on the relationship between marginal product and average product,
which curve appears to be average product?
a.
b.
c.
d.
Curve 1
Curve 2
Both curves appear to be average product curves.
Neither curve appears to be an average produce curves.
20. Refer to the table below. What is the marginal cost of producing the 200th pizza?
a.
b.
c.
d.
$0.00
$2.60
$3.25
$650.00
292
21. Refer to the graph below. Based on the relationship between average total cost and marginal cost,
which of the curves below appears to be average total cost?
a.
b.
c.
d.
Curve 1
Curve 2
Both curves appear to be average cost curves.
Neither curve appears to be an average cost curve.
22. Refer to the graph below. For a certain output range (or quantity of pizzas produced per day),
marginal cost is greater than average cost. What is this output range?
a.
b.
c.
d.
23. When marginal cost is less than average total cost, average total cost must be
a. increasing.
b. decreasing.
c. constant.
d. None of the above.
24. When average product of labor is increasing,
a. marginal product of labor equals average product of labor.
b. marginal product of labor is less than average product of labor.
c. marginal product of labor is greater than average product of labor.
d. None of the above is true.
294
a.
b.
c.
d.
26. Refer to the graph below. At any level of output, what is the vertical distance between Curve 2 and
Curve 3 equal to?
a.
b.
c.
d.
Curve 1
Curve 4
total cost
marginal cost
27. The following cost measures reach their minimum points when they are equal to the value of
marginal cost, except one. Which cost measure is the exception?
a. average variable cost
b. average total cost
c. average fixed cost
d. There is no exception; all three measures above reach their minimum values when they are equal
to the value of marginal cost.
28. Marginal rate of technical substitution is
a. the rate at which firms are able to substitute one input for another while keeping the level of
output constant.
b. the rate at which firms are able to substitute one input for another while increasing the level of
output constant.
c. the rate at which firms are able to substitute one input for another while decreasing the level of
output constant.
d. none of the above.
296
29. Refer to the graph below. How much is the value of total fixed cost?
a.
b.
c.
d.
$2,400
$3,400
$5,800
None of the above; total fixed cost cannot be computed using this graph.
30. Refer to the table below. What is the marginal cost of producing the 640th pizza?
a.
b.
c.
d.
$43.33
$650.00
$4,050.00
$4,700.00
31. Refer to the table below. What is the average total cost of producing 550 pizzas?
a.
b.
c.
d.
$5.00
$6.48
$13.00
$26.00
32. What happens to the difference between average variable cost and average total cost as the level of
output increases?
a. The difference increases.
b. The difference decreases.
c. The difference remains the same.
d. The difference first increases then decreases.
33. Fill in the blanks. As output increases, the vertical distance between average total cost and average
variable cost curves gets _______ and equals _______.
a. smaller; total fixed cost
b. larger; average fixed cost
c. smaller; average fixed cost
d. larger; marginal cost
34. Which of the following terms refers to the lowest cost at which a firm is able to produce a given level
of output in the long run, when no inputs are fixed?
a. the long-run marginal cost curve
b. the long-run average cost curve
c. the variable inputs curve
d. economies of scale
35. Economies of scale
a. happens when the firms long-run average total cost decreases as output increases.
b. is represented by the downward-sloping part of the long-run average cost curve.
c. Both (a) and (b) are correct.
d. None of the above is correct.
298
36. Refer to the graph below. Which change in output represents economies of scale in bookselling?
a.
b.
c.
d.
37. Refer to the graph below. Which level of output represents the minimum efficient scale?
a.
b.
c.
d.
1,000 books
20,000 books
40,000 books
80,000 books
38. Refer to the graph below. In what output range do we find constant returns to scale?
a.
b.
c.
d.
39. Refer to the graph below. Which bookstore is more likely to experience diseconomies of scale?
a.
b.
c.
d.
300
2.
The total cost curve increases at a decreasing rate first, then at an increasing rate after that. How
does the marginal cost curve look like then?
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
3. Figure 11.6 on page 366 in the textbook illustrates the long-run average total cost curve in the
automobile industry. The average total cost of selling 500,000 cars per month ($32,000) is greater
than the average total cost of selling 400,000 cars per month ($27,000). If a car factory sells
500,000 cars at a cost of $32,000 each, is it producing inefficiently?
____________________________________________________________________________
____________________________________________________________________________
4. When the average variable cost is decreasing, marginal cost is less than average variable cost.
When average variable cost is increasing, marginal cost is higher than average variable cost.
Comment on this statement.
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
5. Your friend argues that If the firms LRAC curve is downward sloping, then the firm enjoys
economies of scale, while if the firms LRAC curve is upward sloping, then the firm has
diseconomies of scale. Comment on this argument.
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
True/False Questions
T F
T F
T
T
T
T
T
T
F
F
F
F
F
F
T F
T F
T F
T F
T F
T F
T F
1. In the short run, as the marginal product of labor (the variable factor) rises, marginal cost
falls (assuming the wage rate remains constant as the quantity of labor hired changes).
2. Technological change refers to a change in the ability of the firm to produce a given level of
output from a given amount of inputs.
3. In the long run, all the firms inputs are fixed.
4. An average fixed cost curve has a U shape.
5. For some levels of output, SRAC can be less than LRAC.
6. When the average product of labor increases, marginal cost decreases.
7. In the short run, the change in total cost is equal to the change in variable cost.
8. Isoquants are curves that represent all the combinations of two inputs that have the same
total cost.
9. In the short run, if an increase in output causes average total cost to increase, then marginal
cost must be greater than average total cost.
10. The relationship between the inputs employed by a firm and the maximum output it can
produce with those inputs is a production function.
11. The marginal cost curve intersects the average variable cost curve at its maximum point.
12. An implicit cost is the cost of purchased inputs and involves spending money.
13. According to the law of diminishing returns, as more workers are hired in the short run, the
marginal product of labor always decreases.
14. Technological change is the development of a new product or process for making the
product.
15. Average variable cost curve is U shaped, while average total cost curve is an inverted
U shape.
302
304
4. The statement is correct. When AVC is decreasing, MC is less than AVC. When AVC is increasing,
MC is higher than AVC. MC intersects AVC at its minimum point.
5. Your friend is correct. When the LRAC curve is downward sloping, the firms LRAC decreases as
output increases; this is economies of scale. When the LRAC curve is upward sloping, the firms
LRAC increases as output increases; this is diseconomies of scale.
True/False Answers
Question Answer
1.
T
2.
3.
4.
F
F
5.
6.
7.
F
T
8.
9.
10.
11.
12.
13.
F
F
F
14.
15.
Comment
See the section Why Are the Marginal and Average Cost Curves U-Shaped?
beginning on page 361 in the textbook.
Technological change is the ability of the firm to produce a specific level of output
put from a given amount of inputs.
In the long run, all inputs are variable, not fixed.
The average fixed cost curve decreases as output increases. Its shape is a
rectangular hyperbola, not a U shape.
SRAC cant be less than LRAC for any level of output. LRAC is the lowest cost of
producing any level of output.
When the marginal product of labor increases, marginal cost decreases.
The change in total cost is equal to the change in total variable cost, which is the
marginal cost, due to fixed costs being constant in the short run.
Isocost lines represent all the combinations of two inputs that have the same total
cost. Isoquants represent different combinations of inputs that produce the same
level of output.
If the quantity of output is such that marginal cost is greater than average total cost,
then average total cost increases.
The production function shows the relationship between different combinations of
inputs and the maximum output produced with these inputs.
MC intersects AVC curve at its minimum, not maximum, point.
This is the definition of explicit, not implicit, cost.
In the short run, the marginal product of labor (the variable factor) increases
initially but eventually decreases.
This is the definition of invention, not the definition of technological change.
Technological change is the ability of the firm to produce a specific level of output
from a given amount of inputs.
Both AVC and ATC curves are U shaped.