Question

If, in the long run, a small firm were to expand its scale of operations, then initially it should expect to encounter ____________.

a.	decreasing total costs	b.	diseconomies of scale
c.	rising average total costs	d.	economies of scale

The positive slope of the supply curve can be explained by comparative advantage and opportunity cost.

a.	True	b.	False

There is a change in the price of wine. Which of the following causes the movement along the demand curve?

a.	The pivot in the position of the budget line	b.	The income effect
c.	Both the substitution effect and the income effect	d.	The substitution effect

Firms will engage in which of the following?

a.	Neither profit seeking or rent seeking behavior	b.	Profit seeking behavior only
c.	Rent seeking behavior and not profit seeking behavior	d.	Both profit seeking and rent seeking behavior

The combination of Good A and Good Z that gives consumer equilibrium can be computed by which of the following?

a.	Price of Good A/marginal utility of Good A = price of Good Z/marginal utility of Good Z	b.	Using the total utility of Good A/price of Good A = total utility of Good Z/price of Good Z
c.	Marginal utility of Good A/price of Good A = marginal utility of Good Z/price of Good Z	d.	Using the marginal utility of Good Z/price of Good A = marginal utility of Good Z/price of Good A

Answer 1

(1) (d) Economies of scale.

The initial part of the long run average cost is downward sloping to illustrate how average cost initially decreases due to economies of scale while the firm experiences increasing returns to scale. In the long run the firm benefits from both internal and external economies of scale. These are of two types internal and external economies. The firm benefits from internal economies by expanding operations and it benefits by external economies when the industry expands. These economies of scale bring cost advantages, as they have the effect of lowering the firm's average cost of production. As the long run average cost falls by increasing all inputs to produce more output this is referred to as increasing returns to scale.

(2) (b) False

Explanation: Comparative advantage is the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.

Opportunity cost: the loss of other alternatives when one alternative is chosen.

(3) (c) Both substitution and income effect

The demand curve could shift to the right for the following reasons:

• The good became more popular (e.g. fashion changes or successful advertising campaign)
• The price of a substitute good increased.
• The price of a complement good decreased.
• A rise in incomes (assuming the good is a normal good, with positive YED)
• Seasonal factors.

(4) (b) Profit seeking behavior only

(5) (c) Marginal utility of Good A/price of Good A = marginal utility of Good Z/price of Good Z