Inputs and the Cost of Production

Question 1

Describe economies of scale (also called increasing return to scale).

Answer 1

The long-run average cost curve is decreasing, reflecting that the quantity of output is increasing in greater proportion than the increase in inputs, largely due to specialization of labor and equipment.

Question 2

Identify and describe the time periods of analysis used in economics.

Answer 2

1. Short-run time period: At least one input to the product process cannot be varied (i.e., and at least one input is fixed.)
2. Long-run time period: Quantity of all inputs to the production process can be varied.

Question 3

What are the three major kinds (types) of cost used in short-run economic analysis?

Answer 3

1. Total Cost = Total Fixed Cost + Total Variable Cost
2. Average Cost = Cost per unit of commodity produced
3. Marginal Cost = Cost of the last acquired unit of an input

Question 4

Give three examples of fixed cost.

Answer 4

1. Property T]taxes
2. Contracted rent
3. Insurance

Question 5

Give three examples of variable cost.

Answer 5

1. Raw materials
2. Most labor
3. Electricity

Question 6

Define the “law of diminishing returns”.

Answer 6

The point at which the quantity of variable inputs begins to overwhelm the fixed factors, resulting in inefficiencies and diminishing return on marginal units of variable inputs.

Question 7

Which short-run average cost curves have a “U” shape?

Answer 7

Average variable cost, Average total cost and Marginal cost curves have a “U” shape. Average fixed cost has a continuously downward-sloped curve.

Question 8

Identify and describe the kinds (types) of cost that make up total cost.

Answer 8

1. Total Fixed Cost (FC): Costs which cannot be changed with changes in the level of output.
2. Total Variable Cost (VC): Costs for variable inputs which will vary directly with changes in the level of output
3. Total Cost (TC) = FC + VC