Question

Diminishing returns *

1 point

a. characterize all stages of production.

b. eventually occur in all short-run production situations.

c. are always associated with declining average product in the short-run.

d. exist in the short run, because as additional units of an input are hired, the firm has to accept less satisfactory units.

In the long run, average total cost exhibits a pattern just like the short run average total cost because of this reason. *

1 point

a. Increasing and decreasing returns are associated with more outputs produced.

b. Economies and diseconomies of scale are experienced as a firm gets bigger in size.

c. Law of diminishing returns starts to set in.

d. None of the above explains the shape of a long run average total cost curve

Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant. Your aunt’s opportunity costs comprise *

1 point

a. the accounting costs.

b. the accounting costs and the implicit costs.

c. all economic costs.

d. none of the above

Answer 1

1. Diminishing retuns d) exist in the short run, because as additional units of an input are hired, the firm has to accept less satisfactory units.

(Diminishing returns due to decrease in productivity of the variable factor whereas fixed factor remains constant)

2. In the long run, average total cost exhibits a pattern just like the short run average total cost because of this reason - b) Economies and diseconomies of scale are experienced as a firm gets bigger in size.

(In the long run as firm expands the firm faces many economies of scale which being down the price but after a point diseconomies begin to creep up which increases cost of production. This makes the lon g run average curve U-shaped).

3. Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant. Your aunt’s opportunity costs comprise d) none of the above

(Economic costs = accounting costs + opportunity costs. Also, opportunity cost is defined as the cost of the foregone alternative. None of the options in the question satisfy these conditions. The opportunity cost here would be cost of quitting the jobe which is 50,000 dollars per year.)

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