Chapter 11

Question 1

Characteristics of the “short run”

Answer 1

• Quantity of one or more resources is fixed.
• The capital is fixed.
• Resources (labour, raw materials and energy) are variable
• Decisions are easily reversed.

Question 2

Characteristics of the “long run”

Answer 2

• Quantities of all resources can vary

- Decisions are not easily reversed.

Question 3

Sunk Cost

Answer 3

A cost incurred by the firm that cannot be changed.

- Irrelevant to current decisions.

Question 4

3 Concepts that describe the relationship between Quantity output and Labour

Answer 4

Total Production: The maximum output that a given quantity of labour can produce.

AP = TP / L
MP = ∆TP / ∆L

Question 5

Marginal product

Answer 5

The change in total product that results from a one-unit increase in the quantity of labour employed. (all other inputs remaining the same).

MP = ∆Q / ∆L = ∆TP / ∆L

Question 6

Law of diminishing returns

Answer 6

As a firm uses more of a variable input with a given quantity of fixed inputs,
the marginal of the variable input eventually diminishes.

Question 7

Total cost

Answer 7

cost of all resources used

Question 8

Total fixed cost

Answer 8

the cost of the firm’s fixed inputs

Question 9

Total variable cost

Answer 9

the cost of the firms variable inputs

Question 10

Average fixed cost (AFC)

Answer 10

the total fixed cost per unit of output.

Question 11

Average variable cost

Answer 11

the total variable cost per unit of output.

Question 12

Average total cost

Answer 12

the total cost per unit of output.

Question 13

Marginal cost

Answer 13

the increase in total cost that results from a one-unit increase in total product

Question 14

formula for marginal cost (MC)

Answer 14

MC = ∆TC / ∆Q

Question 15

Why are MC-curves U-shaped?

Answer 15

Over the output range, with increasing marginal returns, MC falls as Q increases.
Over the output range with diminishing marginal returns, marginal cost rises as output increases.

Question 16

Why are ATC & AVC curves U-shaped

Answer 16

Initially, MP > AP
»> rising AP and falling AVC

• Eventually, marginal product falls below average product, which brings falling average product and rising AVC.
• ATC is U-shaped for the same reasons and in addition ATC falls at low output levels because AFC is falling steeply.

Question 17

The production function

Answer 17

The behaviour of long-run cost depends upon the firm’s production function, which is the relationship between the maximum output attainable and the quantities of both capital and labour.

Question 18

Long run average cost curve (LRAC)

Answer 18

The relationship between the lowest attainable average total cost and output when both the plant size and labour are varied.

The LRAC is a planning curve that tells the firm the plant size that minimizes the cost of producing a given output range.

Question 19

Economies of scale

Answer 19

Features of a firm’s technology that lead to falling LRAC as Q increases.

Question 20

Diseconomies of scale

Answer 20

Features of a firm’s technology that lead to rising LRAC as Q increases.

Question 21

Constant returns to scale

Answer 21

Features of a firm’s technology that lead to constant LRAC as Q increases.

Question 22

Minimum efficient scale

Answer 22

the smalles quantity of output at which the LRAC reaches its lowest level.