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Questions and Answers
What primarily determines the shape of the short-run average total cost curve?
What primarily determines the shape of the short-run average total cost curve?
- Technological advancements.
- Economies of scale in production.
- Increasing and diminishing marginal returns from the variable resource. (correct)
- The cost of fixed capital.
Which of the following scenarios best illustrates economies of scale?
Which of the following scenarios best illustrates economies of scale?
- A software company that hires more employees, resulting in increased coordination costs and higher average costs.
- A large factory that implements specialized machinery and division of labor, leading to lower average production costs. (correct)
- A local farm that decreases its land usage but maintains the same level of output.
- A small bakery that reduces its output to lower average costs.
What is a typical advantage that larger firms often have over smaller firms related to production?
What is a typical advantage that larger firms often have over smaller firms related to production?
- Lower initial capital investment requirements.
- Ability to utilize larger, more specialized machines. (correct)
- Flexibility in adapting to changing consumer preferences.
- Reduced regulatory oversight.
Why might a McDonald's kitchen be more cost-effective than a small restaurant's kitchen when producing a high volume of meals?
Why might a McDonald's kitchen be more cost-effective than a small restaurant's kitchen when producing a high volume of meals?
If a restaurant is experiencing economies of scale, what happens to its long-run average cost as its size increases?
If a restaurant is experiencing economies of scale, what happens to its long-run average cost as its size increases?
How does specialization of labor contribute to economies of scale?
How does specialization of labor contribute to economies of scale?
At low levels of output, why might a smaller kitchen produce meals at a lower average cost than a McDonald's kitchen?
At low levels of output, why might a smaller kitchen produce meals at a lower average cost than a McDonald's kitchen?
When does long-run average cost tend to decrease as the scale of production increases?
When does long-run average cost tend to decrease as the scale of production increases?
How do larger, more specialized machines contribute to lower average production costs?
How do larger, more specialized machines contribute to lower average production costs?
Which characteristic is least likely to be found in a firm experiencing economies of scale?
Which characteristic is least likely to be found in a firm experiencing economies of scale?
Flashcards
Economies of Scale
Economies of Scale
The principle that shapes the long-run cost curve, where average cost decreases as the firm's scale expands.
Specialized Machinery (Economies of Scale)
Specialized Machinery (Economies of Scale)
As a firm grows, it can use larger, more specialized machines, increasing efficiency.
Specialization of Labor (Economies of Scale)
Specialization of Labor (Economies of Scale)
Larger firms can divide tasks, leading to focused expertise and increased output.
Efficient Facilities (Economies of Scale)
Efficient Facilities (Economies of Scale)
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Study Notes
- The shape of the short-run average total cost curve is mainly shaped by increasing and diminishing marginal returns from the variable resource.
- A different principle shapes the long-run cost curve.
- If a firm experiences economies of scale, long-run average cost falls as the scale of the firm expands.
- A larger firm size often allows for larger, more specialized machines and greater specialization of labor.
- At low rates of output, the smaller kitchen produces meals at a lower average cost than does McDonald’s.
- If production in the smaller kitchen increases beyond, say, 100 meals per day, a kitchen on the scale of McDonald’s would make meals at a lower average cost.
- Because of economies of scale, the long-run average cost for a restaurant may fall as size increases.
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