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ECON 423 Final: ECON 423 Part 1 Final Review

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School
McGill University
Department
Economics
Course
ECON 423
Professor
Ngo Van Long

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Document Summary

Econ 423 chapters 7-8 (7 is short) An industry is said to exhibit economies of scale if the average cost of production falls when the industry"s output expands. There are two types of economies of scale: internal economies and external economies. If large firms can produce at a smaller average cost than smaller firms, we say that there are internal economies of scale (i. e. , in that industry, the economies are internal to the firms). Internal economies may arise when the production requires a fixed lumpy cost. A large output volume enables the fixed cost to be spread over many units, implying declining average cost. External economies: concept applies to the case where the size of a firm does not have any effect on its average production cost, but all firms in the industry achieve lower costs when the industry expands. External economies arise when cluster of firms is more efficient than individual firms in isolation.

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Related Questions

36) A firm encountering economies of scale over some range of output will have a:

a) rising long-run average cost curve.

b) falling long-run average cost curve.

c) constant long-run average cost curve.

d) rising, then falling, then rising long-run average cost curve.

37) When a firm doubles its inputs and finds that its output has more than doubled, this is known as:

a) economies of scale.

b) constant returns to scale.

c) diseconomies of scale.

d) a violation of the law of diminishing returns.

38) The larger the diameter of a natural gas pipeline, the lower is the average total cost of transmitting 1,000 cubic feet of gas 1,000 miles. This is an example of:

a) economies of scale.

b) normative economies.

c) diminishing marginal returns.

d) an increasing marginal product of labor.

39) If all resources used in the production of a product are increased by 20 percent and output increases by 20 percent, then there must be:

a) economies of scale.

b) constant returns to scale.

c) diseconomies of scale.

d) increasing the average total costs.

40) Economies and diseconomies of scale explain why the:

a) short-run average fixed cost curve declines so long as output increases.

b) marginal cost curve must intersect the minimum point of the firm's average total cost curve.

c) long-run average total cost curve is typically U-shaped.

d) short-run average variable cost curve is U-shaped.

Select True/False for the following questions.

1. A country's per capita real income is equal to the product of a nation's population multiplied by the country's aggregate, inflation-adjusted income.

2. A firm experiences economies of scale along the downward-sloping portion of its long-run average cost curve.

3. A free-rider problem arises when individuals presume that others will pay for public goods so that, individually, they can escape from paying for their portion without reducing the production of the public good.

4. Economists measure economic growth as the percentage change in a nation's per capita real income.

5. In a monopolistically competitive industry, firms can earn economic profits in the short run that leads to industry exit and zero long-run economic profits.

6. Moral hazard refers to the likelihood that firms selling particularly poor-quality products are the ones that have the greatest incentive to misrepresent their attributes to sell them.

7. The geographic-based rationale for international trade is that firms seeking to take advantage of external economies and agglomeration naturally exchange products across borders, thereby generating international trade.

A student has just written on an exam that, in the long run, fixed cost will make the average total cost curve slope downward. Why will the professor mark it incorrect?

a) In the long run, there are no fixed costs, meaning the average total cost curve shifts down.

b) In the long run, fixed cost decreases as costs are spread out over a greater quantity of output. Declining fixed cost accounts for the downward-sloping average total cost curve.

c) In the long run, fixed costs increases as firms build new plants and purchase new capital. This means that the average total cost curve will eventually slope upward.

d) In the long run, firms have no fixed cost—all costs are variable. The shape of the long-run average total cost curve is determined by economies of scale.