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Questions and Answers
What is the primary effect of increasing output on average variable costs?
What is the primary effect of increasing output on average variable costs?
- Average variable costs decrease as fixed costs increase.
- Average variable costs initially decrease then increase. (correct)
- Average variable costs remain constant with output changes.
- Average variable costs decrease steadily regardless of output.
What happens to average total cost when marginal cost is below average total cost?
What happens to average total cost when marginal cost is below average total cost?
- Average total cost remains constant.
- Average total cost is at a point of maximum efficiency.
- Average total cost is rising.
- Average total cost is falling. (correct)
Which of the following is NOT a reason for economies of scale?
Which of the following is NOT a reason for economies of scale?
- Increased specialization of labor.
- Smaller machinery usage leading to greater flexibility. (correct)
- Fixed costs that can be spread over a larger output.
- Acquisition of large machinery due to increased production.
When does a firm experience decreasing returns to scale?
When does a firm experience decreasing returns to scale?
What characterizes the short-run average fixed cost curve when output is increased?
What characterizes the short-run average fixed cost curve when output is increased?
Flashcards
Average Total Cost (ATC)
Average Total Cost (ATC)
Total Cost divided by Quantity of Output.
Economies of Scale
Economies of Scale
When increasing output leads to lower average costs.
Diseconomies of Scale
Diseconomies of Scale
When increasing output leads to higher average costs.
Constant Returns to Scale
Constant Returns to Scale
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Increasing Returns to Scale
Increasing Returns to Scale
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Study Notes
Average Costs and Output
- Average Total Cost (ATC) is calculated by dividing total cost (TC) by quantity (Q).
- Average Fixed Cost (AFC) is calculated by dividing fixed cost (FC) by quantity (Q).
- Average Variable Cost (AVC) is calculated by dividing variable cost (VC) by quantity (Q).
Effects of Increasing Output on Costs
- Spreading Effect: Increasing output spreads fixed costs over more units, leading to a decrease in average fixed cost. This effect is initially sharp, then less pronounced.
- Diminishing Returns Effect: Increasing output requires more variable inputs, which can lead to an increase in average variable cost. This effect is initially less pronounced, then it increases.
Marginal Cost and Average Total Cost
- The marginal cost (MC) curve intersects the average total cost (ATC) curve at the ATC's lowest point.
- If MC is above ATC, ATC is rising.
- If MC is below ATC, ATC is falling.
Long-Run Total Cost
- Long-run total cost (LRTC) is the minimum cost of producing each output level when all inputs can be adjusted.
Returns to Scale
- Constant Returns to Scale: Output increases proportionally to input.
- Increasing Returns to Scale (Economies of Scale): Output increases more than proportionally to input, causing cost per unit to decrease.
- Decreasing Returns to Scale (Diseconomies of Scale): Output increases less than proportionally to input, causing cost per unit to increase.
Reasons for Economies of Scale
- Spread of fixed costs
- Specialization
- Large machinery
Reasons for Diseconomies of Scale
- Increased complexity of management
- Geographic limitations (moving to new markets)
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Description
Test your understanding of average costs, the effects of increasing output on costs, and the relationship between marginal cost and average total cost. This quiz will cover essential concepts in economics that are crucial for comprehending production costs and efficiency in the long run.
