Question

5. A Cobb-Douglas production function will yield a cost function that has constant Marginal Cost a. True b. False ______

6. The MC of a firm will intersect the ATC at the minimum point of MC a. True b. False _____

7. For a cost-minimizing firm, it can continue to operate even if profits are negative. a. True b. False _____

8. What cost concept do you use to determine whether a firm will shut down? a. Marginal Cost b. Average Variable Cost c. Average Total Cost

Answer 1

5. A Cobb-Douglas production function will yield a cost function that has constant Marginal Cost :- True, Cobb-Douglas production function will yield a cost function that has constant Marginal Cost when a1+a2=1 which gives constant returns to scale. Other than that the MC will not be constant.

6. The MC of a firm will intersect the ATC at the minimum point of MC :- False, MC cuts ATC at the minimum of ATC not at the minimum of MC.

7. For a cost-minimizing firm, it can continue to operate even if profits are negative:- True, it can continue to operate even if the profits are negative but only if the price is above the minimum average variable cost. If it is less than the minimum average variable cost then the firm should shut down. Even when the firm is not producing anything, it is incurring fixed costs that it has invested while setting-up the plant.

8. What cost concept do you use to determine whether a firm will shut down? :- b) Average variable cost is used to determine whether a firm will shut down or not. If the price is above the minimum average variable cost, it should continue operating in short-run but if it is less than the minimum average variable cost then the firm should shut down.