Chapter 7

Question 1

What is the law of diminishing marginal returns

Answer 1

As you try to expand output, your marginal productivity eventually declines

Marginal productivity = the extra output associated with extra inputs

(Primarily a short-run phenomenon - “fixed costs become variable in the long-run)

Question 2

What causes diminishing marginal returns

Answer 2

1. The difficulty of monitoring and managing a larger workforces
2. The increasing complexity of larger systems
3. The fixed nature of some factors

These are known as bottlenecks

Question 3

What does diminishing marginal productivity imply

Answer 3

Diminishing marginal productivity implies increasing marginal cost

Increasing MC leads to Increasing AC

Question 4

Increasing MC leads to what

Answer 4

Increasing MC leads to increasing average costs (AC)

Question 5

Define “economies of scale”

Answer 5

short run “fixity” vs. long run “flexibility”

Question 6

What are the 3 impacts to scale of long-run average costs

Answer 6

1. Constant returns to scale: when long-run average costs are constant wrt output
2. Decreasing returns to (or diseconomies of) scale: when long-run average costs rise with output
3. Increasing returns to (or economies of) scale: when long-run average costs fall with output

Question 7

Name 3 variables that can drive economies of scale

Answer 7

1. Capital equipment (e.g., machinery): average costs decrease as volume increases and fixed costs are unchanged
2. Purchasing economies: e.g., buying in large quantities
3. Shared administrative costs

If you enable others to leverage economies of scale, make sure to try to share in the benefits by demanding lower prices

Question 8

Give 2 examples of factors that can cause
decreasing returns to scale in the long run

Answer 8

1. The fixity of some input
2. Managerial structure does not scale

Question 9

Define is a learning curve

Answer 9

The benefit of previous experience helping drive efficiencies going forward
(I.e. produce more at lower costs)

A learning curve means that current production lowers future costs

“Look ahead and reason back”

Question 10

What are economies of scope

Answer 10

When the cost of producing two products jointly is less than the cost of producing two products separately

Cost (Q1,Q2) < (Cost (Q1) + Cost (Q2)

(A major cause of mergers)

Question 11

What are diseconomies of scope

Answer 11

When the cost of producing two goods together is more than the cost of producing them separately

The item that costs more is called an “extruder”