Costs of Production

Question 1

Total Fixed Cost is:

Answer 1

a cost that must be paid whether or not the firm produces any output and does not vary with the level of output

Question 2

Total Cost is:

Answer 2

total fixed cost plus total variable cost

Question 3

Average Fixed Cost (Per Unit):

Answer 3

Total Fixed Cost/Quantity

Question 4

Average Total Cost:

Answer 4

Total Cost/Quantity

Question 5

Average Variable Cost

Answer 5

(Total Cost - Total Fixed Cost)/Quantity

Question 6

Marginal Cost

Answer 6

the additional cost of producing an additional unity

Question 7

Economies of Scale vs. Diseconomies of Scale

Answer 7

There are economies of scale when the long-run average total cost declines with increases in output. There are diseconomies of scale when the long-run average total cost increases with increases in output.

Question 8

Why is the Average Total Cost Curve U-Shaped

Answer 8

At low levels of output, average total cost initially falls, because average fixed costs decline quickly as output expands. However, average total cost rises at high levels of output because of diminishing marginal product.

Increasing output, therefore, has two opposing effects on average total cost. Decreasing AFC is strong for lower output levels, but eventually increasing AVC dominates, making the average total cost curve U-shaped.