Use the following to answer question 16: Table: Output and Marginal Cost Output

Question

Use the following to answer question 16: Table: Output and Marginal Cost Output Marginal Cost 15 10 12 20 6 16. (Table: Output and Marginal Cost) Look at the table Output and Marginal Cost. After graduation you achieve your dream of opening an art shop that specializes in selling mud statues. How many statues should you produce to minimize your average costs? A) two B) three C) four D) five 17. A firm that has lower costs per unit as it increases production in the long run has: B) C) D) increasing returns to scale. decreasing returns to scale. increasing opportunity costs. scale reduction. 18. The short-run average total cost curve is U-shaped because at low output levels the spreading effect of falling average fixed costs dominates the diminishing returns effect, while at high output levels the reverse is true. A) True B) False

Explanation / Answer

16) We must find ATC. For this we compute total cost from marginal cost and use ATC = TC/Q

correct choice is Option C

17) With production increases, LRATC falls when there are economies of scale and these are called increased returns. so the correct option is A

18) TRUE

LRATC falls as output increases because AFC is falling for all the output levels and so it dominates initially but later when there is continuous increase in output this dominance is lost.

Q MC TC ATC 1 15 15 15.00 2 10 25 12.50 3 5 30 10.00 4 8 38 9.50 5 12 50 10.00 6 20 70 11.67

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