Question

1 We say a firm is operating in the short run if:

a. they aren't making much profits. this is wrong

b. all costs are variable.

c. they are making decisions with less than a year horizon.

d. there are fixed costs of production.

2. What best explains why the firm's marginal cost curve is upward sloping?

a. The more you produce the more you have to pay for each additional variable input. this is wrong

b. Because average fixed costs increase the more the firm produces.

c. The inverse relationship between marginal productivity and marginal cost.

d. None of these are correct.

Answer 1

Question 1

Short-run refers to the time period pertaining to production process in which some factors of production are taken as fixed while others are taken as variable. In other words, quantity of some factors of production can not be changed in short-run as the output produced changes while quantity of other factors can be changed.

So, if a firm has fixed factors of production then it implies that firm is operating in the short-run.

Thus, in short-run, firm incurs two type of costs - fixed cost and the variable cost.

A firm can operate in short-run, even though, it is making loss, if it is able to recover its variable cost.

So, the options (a), (b), and (c) are incorrect.

Thus, it can be stated that a firm is operating in the short-run if there are fixed costs of production.

Hence, the correct answer is the option (d).

Question 2

Marginal cost of production implies the cost of each additional input utilized in the production process.

Marginal cost is not related to fixed cost and average fixed cost tends to decrease as more output is produced.

The law of diminishing returns states that as more units of inputs are used the output produced by each additional input employed keeps on declining.

Thus, marginal product declines as more inputs are employed. However, there exists an inverse relationship between marginal product and marginal cost.

So, as marginal product declines, marginal cost tends to increase.

So, the options (a), (b), and (d) are incorrect.

The firm's marginal cost curve is upward sloping because of the inverse relationship between marginal productivity and marginal cost.

Hence, the correct answer is the option (c).