Question

1. Draw a correctly labeled graph showing a long-run average cost curve.  Label the sections showing economies of scale, diseconomies of scale and constant returns to scale.   Explain economies of scale, constant returns to scale, and diseconomies of scale.

Multiple Choice

1. In the long run:
   1. All inputs can be varied.
   2. No inputs can be varied.
   3. Only variable inputs can be varied.
   4. Only fixed inputs can be varied.
   5. A limited number of inputs can be varied.
2. Sunk costs:
   1. Are costs that can be recovered when production is halted.
   2. Are costs that should be not ignored in future decisions.
   3. Are costs that should be ignored in future decisions.
   4. Are incurred in the short run only.
   5. Are costs of production that reoccur.
3. If the LRATC is falling the firm is experiencing:
   1. decreasing AVC.
   2. constant returns to scale.
   3. economies of scale.
   4. diseconomies of scale.
   5. cost minimization.
4. If the LRATC is rising the firm is experiencing:
   1. increasing AVC.
   2. constant returns to scale.
   3. economies of scale.
   4. diseconomies of scale.
   5. cost maximization.

Answer 1

Ans:

Economise of scale occurs when the cost of production decreases in the subsequent level of production. It is due to efficient use of resources , specialization , under utilization of fixed factors ,division of labor, etc.

Constant return to scale occurs when the output increases in the same proportion as inputs increases.

Diseconomies of scale occurs when the cost of production increases in the subsequent level of production. It is due to inefficient use of resources , over utilization of fixed factors , lack of motivation, etc.

Ans: All inputs can be varied.

Explanation:

Short-run is a time period where some factors of production are fixed whereas long-run is a time period where all factors of production are variable.

Ans: Are costs that should be ignored in future decisions.

Explanation:

Sunk cost are those cost which can not be recovered if the firm shutdown the production process. So sunk  costs should be ignored in future decisions.

Ans: economies of scale.

Explanation:

If the LRATC is falling the firm is experiencing economies of scale in the production process. It means cost of production decreases in the subsequent level of production.

Ans: diseconomies of scale

Explanation:

If the LRATC is rising the firm is experiencing diseconomies of scale in the production process. It means cost of production increases in the subsequent level of production.