a. The firm\'s capacity increases excessively, which causes an increase in costs

Question

a. The firm's capacity increases excessively, which causes an increase in costs.

b. Economies of scale arise when the firm expands its output due to specialization.

c. The firm may be able to duplicate its operations at the same cost once an output level is reached.

d. In the long run, the plant size is fixed; therefore, an increase in production may cause the costs to remain flat once it has reached a specific level.

2. The Finger Lakes region in New York produces wine. The climate favors white wines, but red wines have been produced successfully in the past 15 years. Which of the following represents a variable cost?

a. The electricity bill on the building.

b. The cost of the building where wine tastings take place from April to October.

c. The salary of the chief wine maker who is employed year-round and receives bonuses based on the amount of wine produced.

3. The movie industry earns a substantial portion of their total revenues through Internet streaming and downloads. Although producing a movie can costs tens of millions of dollars, the marginal cost of producing another copy or download is practically nothing. For this industry, would short-run average total cost (ATC) and marginal cost (MC) still be U-shaped?

a. ATC is U-shaped while MC is almost horizontal.

b. Both curves do not maintain the U shape.

c. ATC becomes horizontal while MC remains U-shaped.

Explanation / Answer

Part 1: The statement “In the long run, the plant size is fixed; therefore, an increase in production may cause the costs to remain flat once it has reached a specific level,” is wrong as in the long-run existing size of the plant can be increased.

Part 2: The salary of the chief wine maker who is employed year-round and receives bonuses based on the amount of wine produced represents the variable cost as this cost exists till the time wine is being produced.

Part 3: Both curves do not maintain the U shape. This is because if the marginal cost (MC) has become zero then the average total cost (ATC) cannot remain U shaped as its shape moves in tandem with the shape of MC.

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