Economics: Cost Curves and Marginal Returns

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Questions and Answers

What does the law of diminishing marginal returns state?

Holding all inputs constant while using only one will maximize outputs.

Increasing one input while holding others constant will eventually decrease outputs.

Adding more of one input will increase outputs initially, but may decrease them after a point. (correct)

Using multiple inputs will always result in increasing outputs consistently.

Which of the following best describes accounting costs?

Accounting costs are equivalent to economic costs in all scenarios.

Accounting costs are calculated by subtracting opportunity costs from total expenditures.

Accounting costs include only direct expenses incurred.

Accounting costs consist of actual expenditures along with depreciation and expenses. (correct)

How do economic costs differ from accounting costs?

Economic costs are always lower than accounting costs.

Economic costs include accounting costs plus opportunity costs. (correct)

Economic costs include only direct monetary costs.

Economic costs exclude direct expenditures.

What is an essential condition for the law of diminishing marginal returns to apply?

Holding all other inputs constant while varying only one. Signup and view all the answers

Which statement regarding the relationship between inputs and outputs is accurate?

There is a point after which additional inputs yield lower increases in output. Signup and view all the answers

What does the marginal cost (Mc) represent in terms of total cost and output?

The change in total cost resulting from an incremental change in output Signup and view all the answers

What happens when marginal cost (Mc) is greater than average cost (Ac)?

Average cost is increasing Signup and view all the answers

Which condition applies when marginal cost (Mc) equals average cost (Ac)?

Average cost is at its minimum Signup and view all the answers

In the context of diminishing marginal returns, what occurs if marginal cost (Mc) is less than average cost (Ac)?

Average cost must be decreasing Signup and view all the answers

Using the marginal cost formula, how would you express $Mc$ mathematically?

$Mc = \frac{\Delta C}{\Delta Q}$ Signup and view all the answers

At which level of production does marginal cost begin to increase according to the provided data?

Output level 5 Signup and view all the answers

What is the marginal cost at an output level of 4?

$5$ Signup and view all the answers

If the total cost rises from $26$ to $35$ as output increases from $4$ to $5$, what is the marginal cost associated with this change?

$9$ Signup and view all the answers

In which market context is the tendency to cooperate greater?

In a growing market Signup and view all the answers

What is one likely factor that affects the cooperation tendency among firms?

The overall uncertainty in the market Signup and view all the answers

What does the term 'Nash outcome' refer to in the context of game theory?

A scenario where no player benefits from changing their strategy alone Signup and view all the answers

In a sequential game, which condition typically affects the actions of the players involved?

The timing of each player's decisions Signup and view all the answers

Which scenario exemplifies a contracting market?

A shrinking number of consumers in a specific sector Signup and view all the answers

In a monopolistic competition, how do firms compete in the market?

By providing similar yet differentiated products. Signup and view all the answers

What happens to the market demand when new firms enter a monopolistic competition?

It decreases for existing firms. Signup and view all the answers

In the short run, how do individual firms maximize profits?

By producing where marginal revenue equals marginal cost. Signup and view all the answers

What occurs to the demand curve of existing firms when new firms enter the market?

The demand curve shifts to the left. Signup and view all the answers

In monopolistic competition, why do consumers benefit?

There is a wider variety of products available. Signup and view all the answers

What is the shape of the demand curve faced by an individual firm in monopolistic competition?

Downward sloping and elastic. Signup and view all the answers

At which point does equilibrium in the long run occur for a firm in monopolistic competition?

When marginal revenue equals marginal cost and profit is zero. Signup and view all the answers

Why do firms prefer monopolistic competition over perfect competition?

They have more control over their products as they are differentiated. Signup and view all the answers

Under Hotelling's Boardwalk model, how do ice cream sellers attract consumers?

By positioning closer to a larger consumer base. Signup and view all the answers

In monopolistic competition, how does the entry of new firms affect existing firms' prices?

Prices will decrease as competition increases. Signup and view all the answers

At what point does a perfectly competitive firm maximize its profit?

When P equals marginal cost Signup and view all the answers

Which condition indicates that a firm should continue producing in the short run?

P > AVC Signup and view all the answers

What happens when price is equal to average total cost at the break-even point?

The firm achieves zero economic profit Signup and view all the answers

If a firm is producing where P < MC, what should the firm do?

Decrease production Signup and view all the answers

During the short run, a perfectly competitive firm will produce a quantity where P equals

Marginal Cost Signup and view all the answers

What indicates a firm's production decision if P is greater than average variable cost but less than average total cost?

The firm should continue operating but will incur a loss Signup and view all the answers

What is the economic implication if a firm experiences P < ATC over a sustained period?

It may result in market exit Signup and view all the answers

In the long run, what is expected of a perfectly competitive firm making economic profits?

New firms will enter the market Signup and view all the answers

If a firm is operating at P = MC and realizes a loss, what does this imply about its variable costs?

Average variable cost is greater than price Signup and view all the answers

At the point of maximizing profits, total revenue equals total cost when the firm is

At the break-even point Signup and view all the answers

Which statement is true about a firm's short-run supply curve in perfect competition?

It is found where MC is greater than AVC Signup and view all the answers

If all firms in a perfectly competitive market face the same cost structure and enter at the same time, what will likely happen in the long run?

The market will reach a long-run equilibrium Signup and view all the answers

Which of the following best describes the condition for a firm to produce in the long run in a perfectly competitive market?

P must exceed ATC Signup and view all the answers

What is the primary factor that determines a firm's supply in a perfectly competitive market?

Market price of the product Signup and view all the answers

When should a firm shut down its operations in the short run?

When P < AVC Signup and view all the answers

Study Notes

Law of Diminishing Marginal Returns

If more than one input is used in production, holding all other inputs constant, outputs will increase but eventually at a diminishing rate.

Costs

Accounting costs: Actual expenditures plus depreciation expenses
Economic costs: Accounting cost plus opportunity cost.

Marginal Cost

The change in total cost resulting from an incremental change in output: MC = (ΔC / ΔQ)

Shapes of Cost Curves

When the incremental change in total cost is greater than the average cost, the average cost is increasing.
When the marginal cost is less than the average cost, the average cost is decreasing.
When the marginal cost is equal to the average cost, the average cost is at its minimum.

Marginal Average Rule

If MC > AC, AC is increasing
If MC < AC, AC is decreasing
If MC = AC, AC is at minimum

Short-Run Cost Curves

For a perfectly competitive firm, P = MR for all output (Q).
A perfectly competitive firm maximizes profit at the quantity where MR = MC.
The profit-maximizing rule is to produce where MR = MC.
Profit = TR - TC = (P - AC)Q
If P > AVC, the firm should produce the quantity where P = MC.
If P = AVC, the firm breaks even.
If P < AVC, the firm should shut down.

Long-Run Cost Curves

In the long run, all inputs can be changed.
A firm will adjust its production to the level where P = MC in the long run.
New firms will enter the market if profits are positive, causing the demand for existing firms to decrease.
Firms will exit the market if profits are negative, causing the demand for existing firms to increase.
Equilibrium in the long run is where P = MC = AC.
Social welfare is maximized at the point where P = MC.
Deadweight loss is the loss in social welfare due to a market not being in equilibrium.

Monopolistic Competition and Perfect Competition

Firms in monopolistically competitive markets differentiate their products to create brand loyalty, but still face competition from similar products.
Firms in monopolistic competition produce at a higher price than firms in perfect competition, but offer more variety.

Hotelling's Boardwalk

Hotelling's Boardwalk example demonstrates that in a market with two competing firms, each firm locates itself in a way that maximizes its share of the market.
The tendency to cooperate is greater in a growing market than in a contracting market.

Sequential Game

A sequential game is a game where players take turns making decisions.
The first player's decision may affect subsequent decisions.

Dominant Firm

A dominant firm is a firm that has a large market share and can therefore influence market prices.
The tendency to cooperate is greater when the market contains a dominant firm.
Uncertainty can lead to a decrease in cooperation in a sequential game.
Nash Outcome: Players can benefit from cooperation, but the best strategy for each individual player is to not cooperate.

Backward Induction

Analyzing from the end of a game to its beginning.

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Description

This quiz explores key concepts in economics including the law of diminishing marginal returns, accounting and economic costs, and the behavior of cost curves. Understand how marginal cost interacts with average cost and the implications for competitive firms in the short run.