chapter 7

Question 1

long run

Answer 1

time frame where all inputs variable, diminishing marginal product does not apply

Question 2

long run average cost LRAC

Answer 2

shows the per unit cost $/Q of an infinite number of possible plant (factory) dies and all the plants touch the LRAC curve at economic capacity
*plant plans for long run along LRAC but operates in short run

Question 3

EOS

Answer 3

economies of scale
-per unit cost decreases as you increase size of plant and quantity produced increases
*if averRage total cost or AC increases then you move to a bigger plant which brings the average total cost down-
the curve is sloped downward, the more units produced as you increase size the lower the average cost becomes
*bigger output at lower average cost
-INCREASING RETURNS TO SCALE

Question 4

LRAC graph

Answer 4

plotted at economic capacity- economic capacity is at the lowest AC average cost -
3 Long run average cost has 3 different economies: EOS, DOS, and CRS

Question 5

economic capacity

Answer 5

occurs at lowest average cost

Question 6

what does EOS imply

Answer 6

a min ac decreases as output increases: the change in quantity is greater than the change in inputs
*****INCREASING RETURNS

Question 7

EOS occurs from?

Answer 7

technical economies:
-division of labour
-management specialization
-machine specialization
this is production

pecuniary economics:
-lower cost of borrowing
-bulk buying / selling
-selling by-products
-lower cost of advertising 
these relate to money

Question 8

reasons that eos occurs from pecuniary economics

Answer 8

-lower cost of borrowing
bulk buying and selling
selling by products 
lower cost of advertising
money

Question 9

reasons eos occurs technical economies

Answer 9

division of labour
management specialization
machine specialization

Question 10

DOS

Answer 10

diseconomies of scale

• as size increases, and more products are produced, the cost of goods is increasing
• min ac (average cost) at economic capacity increases as output increases

Question 11

LRAC curve for DOS

Answer 11

it slopes upwards because ac at economic capacity is increasing as out put increases

Question 12

what does DOS imply

Answer 12

the percent change in quantity is less than the percent change in inputs
DECREASING RETURNS

Question 13

reasons dos occurs

Answer 13

bureaucratic inefficiencies:

• communication between management levels
• more and more layers of management/government

Question 14

CRS

Answer 14

constant returns to scale
min ac is constant at any amount of product- quantity
percent change in quantity is equal to parent change in inputs

Question 15

LRAC curve for CRS

Answer 15

straight line because ac is constant at any quantity

this means constant returns

Question 16

complete LRAC curve

Answer 16

3 general regions- downward slope EOS, middle flat area- CRS, end upward slope- Dos
MES point: minimum efficient scale– its the output level that first reaches the min LRAC

Question 17

shifting cost curves

Answer 17

decrease in input prices (decrease in wage)

-technological improvement

Question 18

plant 1 -min AC1 is 10$ and you can produce 20

plant 2 -min AC2 is 20$ and you can produce 50 units, which LRAC curve does this represent

Answer 18

DOS as you increase output, input increases– or min AC increases as you move to larger firms
-decreasing returns

Question 19

plant 1 min AC1 is 10$ and you can produce 20 units

plant 2 min AC2 is 2$ and you can produce 50 units, which LRAC curve does this represent?

Answer 19

EOS- increasing returns, ** cost advantages of large scale operations bigger decreases min ac

Question 20

technological improvement definition

Answer 20

change that decreases the cost of production at all output levels