Production and Costs in the Long Run 7.4-2&3 ~ Benjamin Rainwater

Question 1

If a firm’s output increases by the same percentage as the increase in its inputs, it has

Answer 1

constant returns to scale.

Question 2

If a firm’s output increases by a greater percentage than the percentage increase in its
inputs, it has

Answer 2

increasing returns to scale

Question 3

If a firm’s output increases by less than the percentage increase in its inputs, it has

Answer 3

decreasing returns to scale.

Question 4

In the short run, a firm can increase output

only by increasing

Answer 4

labor

Question 5

In the long run, a
firm can change the techniques of its
operation by increasing

Answer 5

labor, tools,

equipment, and/or its factory.

Question 6

The long-run average cost (LRAC) curve is a

Answer 6

U-shaped curve that shows all possible

output levels plotted against the average cost for each level.

Question 7

The LRAC is an “envelope” that contains all possible short-run…

Answer 7

average total cost (ATC)

curves for the firm

Question 8

The point of efficient scale is

Answer 8

the point on the long-run average cost (LRAC) curve where

average cost for a firm is at the minimum

Question 9

Each output point on the LRAC curve

represents a particular combination what?

Answer 9

capital

and labor.

Question 10

The short-run ATC curves represent different
scales of plant that cannot be changed in the
short run. They are all above the LRAC
because

Answer 10

firms have less flexibility in the short

run and costs are higher.

Question 11

Each tangency point

is

Answer 11

the cost-minimizing point for that level of

output.

Question 12

The output and cost combination where the
firm is experiencing constant returns to scale
is called the point of efficient scale. In the
long run, the firm can do no better than this
combination because at no other point in the
long run can its average, or per unit cost,
become more/less

Answer 12

less