Module 56 AP Review
Check Your Understanding
- The accompanying table shows three possible combinations of
fixed cost and average variable cost. Average variable cost is
constant in this example. (It does not vary with the quantity of
output produced.)
Choice Fixed cost Average variable cost
1 $8,000 $1.00
2 12,000 0.75
3 24,000 0.25
a. For each of the three choices, calculate the average total cost
of producing 12,000, 22,000, and 30,000 units. For each of
these quantities, which choice results in the lowest average
total cost?
b. Suppose that the firm, which has historically produced
12,000 units, experiences a sharp, permanent increase in
demand that leads it to produce 22,000 units. Explain
how its average total cost will change in the short run
and in the long run.
c. Explain what the firm should do instead if it believes
the change in demand is temporary.- In each of the following cases, explain whether the firm
is likely to experience economies of scale or diseconomies
of scale and why.
a. an interior design firm in which design projects are
based on the expertise of the firm’s owner
b. a diamond-mining company
Solutions appear at the back of the book.
module 56 Long-Run Costs and Economies of Scale 565
Section(^10)
(^) Behind
(^) the
(^) Supply
(^) Curve:
(^) Profit,
(^) Production,
(^) and
(^) Costs
Tackle the Test: Multiple-Choice Questions
- In the long run,
a. all inputs are variable.
b. all inputs are fixed.
c. some inputs are variable and others are fixed.
d. a firm will go out of business.
e. firms increase in size. - Which of the following is always considered the long run?
a. 1 month
b. 1 year
c. 5 years
d. 10 years
e. none of the above - Which of the following statements is generally correct?
I. The long-run average total cost curve is U-shaped.
II. The short-run average total cost curve is U-shaped.
III. Firms tend to experience economies of scale at low levels
of production and diseconomies of scale at high levels of
production.
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III
4.When making decisions, which of the following costs
should be ignored?
a. average costs
b. total costs
c. marginal costs
d. sunk costs
e. None—no costs should be ignored.- Economies of scale will allow which of the following types of
cities to lower their average total cost of clearing snow by
investing in larger snow plow fleets? Cities with
a. more people.
b. more existing snow plows.
c. less snowfall.
d. larger budgets.
e. more snowfall.