Cost Curves

Question 1

The shapes of the long run AC and MC depend on…

Answer 1

… the shape of the long run TC curve

Question 2

If the (TC) long run cost curve rises less rapidly first and then more rapidly at higher levels, the shape of the MC and AC are… (1) because (2)

Answer 2

… U-shaped
- returns to scale determine the shape of the production function, and the production function, in turn, determines the shape of the LRAC curve and other cost curve

Question 3

in the short run, U-shape forms are explained by….

Answer 3

…. the influence of average fixed costs and diminishing marginal returns. (these arguments are NOT valid in the long run)

Question 4

The LRAC curve must be U-shaped if a production function has…

1.
2.
3.

Answer 4

1. increasing returns to scale at low levels of output
2. constant returns to scale at intermediate levels of output and
3. decreasing returns to scale at high levels of output

Question 5

A cost function shows economies of scale if the AC (1)
Sufficient for this are (2)

Answer 5

1. falls as ouput expands
2. increasing returns to scale

Question 6

The production process has no economies of scale, if…

Answer 6

…an increase in output has no effect on AC

Question 7

A function has diseconomies of scale if…

Answer 7

AC rises when output increases