Practice Questions Tutorial 7

Question 1

Plot the AC curve against the marginal cost (MC) curve. How are their two shapes
related?

Answer 1

MC will always intersect with AC at the lowest point on the AC curve.

Question 2

The firm’s demand curve is downward sloping. What does this mean

Answer 2

This means that this firm has some market power.

Question 3

MR curve is below

Answer 3

the AR/Demand curve

Question 4

Q2: Each of the four separate short-run average total cost curves (SATC) in the figure
below represents a different scale of operation of a firm. PHOTO 19/9

(a) What would be the most efficient level of output for the firm to produce?
(b) If the firm were to expand its scale of operation beyond this point, what would be
the nature of the returns to scale?
(c) Which of the four scales of operation would be appropriate if the firm wished to
produce OA output?
(d) If the firm then wanted to expand to produce OB output, what would be the chosen
scale of operation in the short run and in the long run?
(e) Sketch in the long-run average cost curve for the firm

Answer 4

PHOTO 19/9

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Question 5

Explain how you would expect the upgrade to larger vessels to help shipping
companies achieve economies of scale. Is this the only way for these companies to
achieve such economies?

Answer 5

Economies of scale = ATC falls as fixed cost spread over
larger output). In this case, larger container ships can carry more goods but use the
same fuel as existing container ships. That should mean lower per unit transport
costs, achieving economies of scale. Discuss other sources of economies of scale
open to these shipping companies, including (but not limited to): indivisibilities; use of
alternative equipment or alternative technologies; specialisation; increased
bargaining and purchasing power.