Economics 1021A/B Chapter Notes - Chapter 11: Average Variable Cost, Average Cost, Diminishing Returns

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26 Apr 2015

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ECON 1021A/B Full Course Notes

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All decisions of a firm are aimed at achieving one overriding goal: maximizing profit. The biggest decision an entrepreneur makes is what industry to establish a firm. Decisions about the quantity to produce and the price to charge depends on the market in which the firm operates: But all firms in all types of markets make similar decisions about how to produce. The relationship b/w a firm"s output decision and its costs depend on the decision time frame. Increase in quantity of the variable factor e. g. labour. Long run quantities of all factors of production can be varied: firm can change its plant. Change plant (e. g. buy more machines) and/or amount of labour hired. Sunk cost past expenditure on a plant that has no resale value: irrelevant to a firm"s current decisions, a firm"s current decisions are affected by short-run costs of changing labour or long-run costs of changing plant.

Related Questions

As long as profits remain positive, a firm will want to increase the quantity produced.

Question 3 options:

	1) True
	2) False

Question 4 (1 point)

Only variable costs are relevant to a firm's decision to shut down.

Question 4 options:

1) True

2) False

A competitive firm faces a downward-sloping demand for its product.

Question 1 options:

1) True

2) False

If a firm is producing a quantity along the upward sloping portion of its marginal cost curve at which marginal cost exceeds price and is earning positive economic profits, it should

Question 10 options:

1)	continue to produce this quantity.

2)	decrease the quantity produced because doing so will increase profit.

3)	increase the quantity produced because profits are still positive.

wait for the price to increase to its current marginal cost.

Ultimately, short-run supply curves are upward sloping because of

Question 12 options:

1)	the irrelevance of fixed costs to the firm's decision making.

2)	the factor-price effect.

3)	diminishing marginal returns to the variable inputs.

4)	the equality of demand and marginal revenue for competitive firms.

olivesardine69

Question:

Is it true that in a short-run production process, the marginal cost curve eventually slopes upward because firms have to pay workers a higher wage rate as they produce more output? Explain your answer.

Answer:

According to the definition of the short-run in Investopedia, the short-run, in economics, expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short-run does not refer to a specific duration of time but rather is unique to the firm, industry, or economic variable being studied. A key principle guiding the concept of short-run and long-run is that in the short-run, firms face both variable and fixed costs, which means that output, wages and prices do not have full freedom to reach a new equilibrium. Most businesses make decisions not only about how many workers to employ at any given point in time (i.e. the amount of labor) but also about what scale of an operation (i.e. size of factory, office, etc.) to put together and what production processes to use. In contrast, economists often define the short-run as the time horizon over which the scale of operation is fixed and the only available business decision is the number of workers to employ. Technically, the short-run could also represent a situation where the amount of labor is fixed and the amount of capital is variable, but this is fairly uncommon. The logic is that even taking various labor laws as given, it's usually easier to hire and fire workers than it is to significantly change a major production process or move to a new size of factory or office. In the short-run, one factor of production is fixed, e.g. capital. This means that if a firm wants to increase output, it could employ more workers, but not increase capital in the short-run (it takes time to expand.) Therefore in the short-run, we can get diminishing marginal returns, and marginal costs may start to increase quickly. Also, in the short-run, we can see prices and wages out of equilibrium, e.g. sudden rise in demand, may lead to higher prices, but firms don't have the capacity to respond and increase supply.

Tejvan Pettinger. (2015). Short-run, long-run, very long-run. Glossary Terms. Economics help blog. NY: Helping to Simplify Economic.
Retrieved from: http://www.economicshelp.org/blog/glossary/short-run-long-run-very-long-run/
Short-Run. Short-Run Definition | Investopedia
Retrieved from http://www.investopedia.com/terms/s/shortrun.asp#ixzz4KO1YXsri

I need a peer reply for this, please.

taupeswan96

1- All of the following statements apply to a purely competitive market in the long run, except:

A- In the long run, all inputs are variable in quantity.

B- Firms can expand their plant capacities in the long run.

C- Total fixed costs remain constant even when output expands in the long run.

D- Firms may enter or leave the industry in the long run.

2- Which of the following is true of normal profits?

A- They are necessary to keep a firm in the industry in the long run

B- They are zero under pure competition in the long run

C- They are excluded from a firm's costs of production

D- They are what attract other firms to enter an industry

3- -The long-run supply curve would be perfectly elastic when:

A- An increase in demand does not cause a change in product price

B- An increase in demand causes an increase in product price

C- A decrease in demand causes an increase in short-run supply

D- A decrease in demand causes an increase in product price

4- What happens in a decreasing-cost industry when some firms leave and the industry's output contracts?

A- The average cost will increase

B- The average cost will decrease

D- The total cost will decrease

C- The product price will decrease

5- Which of the following statements about a competitive firm is correct?

A-To maximize profits a competitive firm should produce at that output at which total revenue is greatest

B- In long-run equilibrium a competitive firm will produce at the point of minimum average costs

C- A competitive firm will produce in the short run so long as total receipts are sufficient to cover total fixed costs

D-A competitive firm will close down in the short run whenever price is less than the minimum attainable average total cost

6- When there is allocative efficiency in a purely competitive market for a product, the minimum price producers are willing to accept is:

A- Less than marginal benefit

B- Greater than marginal cost

C- Equal to the amount of efficiency or deadweight losses

D- Equal to the maximum price consumers are willing to pay

7- A patent is the legal right granted to a firm that allows it to:

A- Make copies of other firm's products

B- Be the sole buyer of a particular product or resource

C- Sell its new product exclusively for a set number of years

D- Be the exclusive distributor of a particular imported product

coffeeyellowjacket176

Economics 1021A/B Chapter Notes - Chapter 11: Average Variable Cost, Average Cost, Diminishing Returns

ECON 1021A/B Full Course Notes

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